Research note
Diminishing Marginal Risk Reduction in Diversification
How quickly diversification benefits flatten as holdings are added.
Status
- Research note
Version
- Research note
Date
- 2026-04
Authors
- Aryan Patel
Abstract
A short study of how portfolio risk changes as holdings are added to an equal-weight portfolio, and where the marginal benefit of further diversification begins to flatten. The analysis emphasizes dependence on the sample, market period, portfolio construction, and chosen risk measure.
Research question
Where does adding another holding stop meaningfully reducing portfolio risk?
Methods
- Equal-weight portfolios
- Holdings counts of 10, 20, and 100
- Risk-measure comparison
Data
Public market data (S&P 500), 2021 to 2025.
Results
In the defined setup, a previously reported difference between the 10-stock and 100-stock risk estimates was about 1.78 percentage points. This figure is specific to the sample, period, construction, and risk measure, and is not presented as universal.
Limitations
Results depend on the sample, market period, portfolio construction, and chosen risk measure, and should not be generalized beyond the defined setup.
Code availability
- Internal. Release forthcoming.
Data availability
- Public market data (S&P 500).
AI disclosure
- AI agents assisted with literature retrieval, code generation, analysis support, critique, and drafting. Deterministic systems produced and verified the estimates. A human researcher approved the question, design, interpretation, and release.
Reproduction status
- Internal validation.