Diversification of equity investment portfolios. Application to the IBEX 35

Abstract

At present, there is no unanimity on the effects that stock diversification can have on the total risk of an investment portfolio. In this context, this paper studies some issues related to the evolution of risk in an investment portfolio made up of IBEX 35 stocks. In addition, it is tested whether conclusions drawn for other time periods and in other markets are applicable to the Spanish stock market. The methodology used consists of calculating how the two components that make up the total risk of a portfolio (systematic risk and unsystematic risk) behave as portfolios of increasing size are diversified. The study shows how an increase in the number of securities in the investment portfolio decreases the percentage corresponding to the unsystematic risk component and increases the systematic risk component. Furthermore, it also shows that the benefits of diversification become increasingly marginal as portfolio size increases. Additionally, it is shown that an increase in the number of securities also increases the stability of the Beta of the investment portfolios over time.