The optimal number of stocks for a portfolio depends on time horizons and expected returns. Portfolio concentration affects both diversification and alpha.
Diversification versus Alpha
As performance dispersion across stocks, sectors, and countries widens in tandem with volatility, professional investors are revisiting the alpha generating capabilities of portfolio managers that prefer to run concentrated portfolios.
The rationale being that concentrated portfolios allow more flexibility to outperform 'hard to beat' benchmarks. And given the global macro backdrop and resultant alpha opportunities, this could be the right time to relax investment guidelines and put some passive money to work.
But can idiosyncratic risk be diversified away using a limited number of stocks?
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Reviewing The Options
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Depends On Two Unknowns
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The Case Is Strong