William Dickens wrote:
> >>> Not that much. Assuming constant variance and correlation the variance fraction
>of the possible reduction you can get is inversely proportional to the number of
>stocks you hold (you get half the reduction relative to holding one stock by holding
>2 90% by holding 10 etc). If correlation isn't constant then you should be able to do
>better than that by choosing less correlated stocks.
Right, but if you want to reduce the SD of your return, you've got to
square those numbers - you need 100 stocks to get the SD down by 90%.
And isn't that the measure of risk most people vaguely have in mind?
In any case, I'd like to thank Bill for the only useful investment
information I've learned since the JEL piece on international
diversification.
So Bill, if you had to guess, roughly what expected return reduction
would you get from (a) standard stock-picking and active trading, (b)
managed mutual funds, (c) index funds, and (d) buy and hold with
discount brokers? I would still guess that (c) closes 90% of the
distance between (a) and (d), but I'd like to hear your guesstimate.
--
Prof. Bryan Caplan
Department of Economics George Mason University
http://www.bcaplan.com [EMAIL PROTECTED]
"He wrote a letter, but did not post it because he felt that no one
would have understood what he wanted to say, and besides it was not
necessary that anyone but himself should understand it."
Leo Tolstoy, *The Cossacks*
