The risk of a portfolio is measured using the standard deviation of the portfolio. Active 3 years, 7 months ago. By "fairly concentrated," we mean 12 to 20 stocks.Most investors will discover only a few good ideas in any given year — maybe five or six, sometimes a few more.Investors who hold more than 20 stocks at a time are often buying shares of companies they don't know much about, and then diversifying away the risk by holding lots of different names.It's tough to stray very far from the average return when you hold that many stocks, unless you have wacky weightings like 10% of your portfolio in one stock and 2% in each of the other 45.While many stock investors question many aspects of Modern Portfolio Theory, they do believe it contains some important frameworks that may help you to feel comfortable when investing in a concentrated portfolio.Academics have proved that of your total risk, you can diversify away your unsystematic risk.The larger the number of stocks you own, the more diversified you are, and the less unsystematic risk that you incur.For instance, if the profits of one of your companies are falling below expectations, and if you hold a large number of stocks, chances are another company in your portfolio is exceeding expectations.There is some risk that you can't diversify away the systematic risk.You cannot eliminate the risk from the macroeconomic factors that affect all stocks. Investors can — and many should — do both.The trick is determining how your portfolio can benefit most from each type of investment. Do your assets cluster in particular sectors?Consider investing in mutual funds to gain exposure to countries and sectors that your portfolio currently lacks.Some funds invest in micro-caps, others invest around the globe, and still others focus on markets, such as real estate, that have their own quirks.Stock investors who turn over some of their dollars to an expert in these areas gain exposure to new opportunities without having to learn a whole new set of analytical skills.For example, there are several ways to invest internationally:Purchase U.S. stocks that have extensive international operations.Purchase international stocks that have U.S. listings or American depository receipts.Purchase international stocks on a foreign exchange.Ultimately, your choice depends on your circle of competence and comfort level.While many may feel comfortable with picking their own international stocks, others may prefer to own an international equity fund.Modern Portfolio Theory has been built on the assumption that you can't beat the stock market.If you can't beat the market portfolio, then the best you can do is to match the market's performance.Therefore, academic theory revolves around how to build the most efficient portfolio to match the market.We have taken a different approach in this post.
In this post, we will construct a trading strategy based on portfolio optimization and test the results against the CAPM market portfolio as well as another strategy.
Essentially, the theory says that if you are properly diversified, on average, you will get the same return in the market as if you had bought a passive market index. "If the answer is that you think you can do better than a mutual fund, then you should hold a fairly concentrated portfolio of stocks because that gives you the highest odds of outperforming the averages.
One can construct various portfolios by changing the capital allocation weights the stocks in the portfolio.
The link below will be of help. Weight your portfolio wisely.Don't be too afraid to have some big weightings, but be certain that the highest-weighted stocks are the ones you feel the most confident about.And of course, don't go off the deep end by having, for example, 50% of your portfolio in a single stock.If you follow the fat-pitch method, you won't trade very often. For this reason, it's irrational to quickly move in and out of wide-moat stocks and incur capital gains taxes and transaction costs.Your results, after taxes and trading expenses, likely won't be any better and may be worse.That's why many of the great long-term investors display low turnover in their portfolios. Ask Question Asked 3 years, 7 months ago.