The Role of Alternative Methodology on the Relation Between Portfolio Size and Diversification

An important concern in portfolio management is the number of securities needed to create a well-diversified portfolio. The number of securities that constitute a welldiversified portfolio, however, varies widely among studies. It is demonstrated that past conclusions are highly sensitive to the methodology used in quantifying diversification. This finding motivates the development of alternative methods that reduce the effect of repeated replications on test results. The first approach exploits the power curves of statistical tests, whereas the second approach suggests the use of more robust statistics. Both approaches provide researchers with guidance in the design of future diversification studies.