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Bridge over ocean
1 July 1998 Financial Analysts Journal Volume 54, Issue 4

Naive Diversification

  1. Dirk P.M. De Wit

Some diversifiable risk is always left in a portfolio. The argument here is that the excess risk in a randomly selected portfolio of a given size should be compensated for. The analysis shows that the required excess return of an imperfectly diversified portfolio depends on just two parameters: the equity risk premium and the average correlation between stock returns.

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