Diversification in Portfolios of Individual Stocks: 100 Stocks Are Not Enough

Dale L. Domian
York University
David A. Louton*
Bryant University
Marie D. Racine
University of Saskatchewan
Forthcoming, The Financial Review
Abstract
We examine returns and ending wealth in portfolios selected from 1,000 large U.S.
stocks over a 20-year holding period. Shortfall risk, the possibility of ending wealth being below
a target, is a useful metric for long horizon investors and is consistent with the Safety First
criterion. Density functions obtained from simulations illustrate that shortfall risk reduction
continues as portfolio size is increased, even above 100 stocks. A slightly lower risk can be
achieved in small portfolios by diversifying across industries, but a greater reduction is obtained
by simply increasing the number of stocks.
Keywords: diversification, investment horizon, Safety First, shortfall risk, simulations
JEL Classifications: G11, C15
*Corresponding author: Department of Finance, Bryant University,1150 Douglas Pike,
Smithfield, RI 02917; Phone: (401) 232-6343; Fax: (401) 232-6319; E-mail:
dlouton@bryant.edu
We thank Cynthia Campbell (the editor) and three anonymous referees for their helpful
comments.
1
Expense ratios on index mutual funds are much lower than the costs of actively
managed funds. At the beginning of September 2004, Fidelity Investments cut their annual
expenses to just 0.10% on five popular index funds. Exchange traded funds (ETFs) are a recent
development providing exposure to large numbers of stocks at a very low cost.
2
Twenty-five years ago, discount brokerage firms charged a commission of around $50
for a 100-share purchase. Now a typical commission is about $10 on a 1,000-share transaction. A
$10 commission on a $2,000 purchase is 0.5%, well above the annual cost of some index funds
and ETFs. But if an investor holds the stock for 10 years and then pays another $10 to sell, the
combined commissions are just $2 per year. This is 0.1% of the initial purchase. The
decimalization of share prices also has allowed a reduction in the transaction costs associated
with the bid-ask spread.
1
1. Introduction
Theoretical models imply that investment portfolios should be widely diversified. In the
traditional capital-asset pricing model (Sharpe, 1964), the only efficient portfolio is the market
portfolio containing all risky assets. Individual investors now have many opportunities for
acquiring diversified portfolios at low cost.
1
Nevertheless, many non-institutional investors
continue to buy individual stocks. This has been encouraged by the reductions in commissions
and bid-ask spreads.
2
U.S. tax laws also provide an incentive to invest in individual stocks.
Investors can deduct up to $3,000 per year in net capital losses. Even in a bull market, some
companies share prices decline. A portfolio of individual stocks gives an investor greater
control in timing the realization of capital gains or losses.
A long investment horizon with a target ending wealth is appropriate for many investors,
for example those saving for retirement or for their childrens education. According to the
Federal Reserve Boards Survey of Consumer Finances, education and retirement have become
increasingly important motivations for family savings (Aizcorbe, Kennickell and Moore, 2003).
In the first survey in 1992, 28.5% of respondents gave either education or retirement as the most
important reason for their families saving. In the 2001 survey, these two categories were listed
3
Another example of the increased emphasis on long-run investing is seen in the
proportion of families with direct or indirect holdings of publicly traded stocks. This proportion
was 36.7% in the 1992 survey, and it rose steadily to 51.9% in the 2001 survey.
2
by 43% of the respondents.
3

These investors could be particularly concerned about shortfall risk, the possibility that
ending wealth will be less than the target amount. This attitude is consistent with the Safety First
principle introduced by Roy (1952). According to Safety First, individuals seek to minimize the
chance of some disaster. For a portfolio of assets, the disaster is a gross return less than some
arbitrary quantity d. When d is equal to the gross return on a risk-free investment, Levy and
Sarnat (1972) show that Safety First and the mean-variance criterion select the same optimal
portfolio. In recent decades there has been increased attention to the Safety First philosophy
through the related concepts of downside risk and shortfall constraints (Leibowitz and
Henriksson, 1989; Leibowitz, Bader and Kogelman, 1996; and Sortino and Forsey, 1996).
Perhaps the greatest practical impact of these ideas is the widespread adoption of Value at Risk
(see Jorion, 2000) for risk management.
Our study takes a shortfall approach to determine the appropriate number of stocks in a
portfolio of individual securities. Numerous researchers have attempted to answer the question
of how many stocks are enough. Many finance textbooks and popular publications claim that the
full benefits of diversification can be obtained with just eight to 20 stocks (Newbould and Poon
1993, 1996). This is based on studies comparing the variance of a single asset to the variance of
portfolios with increasingly more securities, an approach pioneered by Evans and Archer (1968).
A similar approach is used by Lai and Seiler (2001) to study diversification within industry
groups.
Several studies recommend a much larger number of stocks. Elton and Gruber (1977)
3
present a total risk measure which includes the conventional variance of portfolio returns plus
the risk that the portfolios mean return will be different from the expected market return. By this
risk measure, a 15-stock portfolio has 32% more risk and a 60-security portfolio has 20% more
risk than a 100-stock portfolio. Statman (1987) uses a Security Market Line approach to
conclude that investors should hold at least 30 securities, and at least 40 if no personal leverage
is employed. Newbould and Poon (1993, 1996) use the S&P 500 companies to form 1,000
portfolios of various sizes. For each size portfolio they calculate the average return and the
average variance of return, and show that an investor who wants to be within 5% of the average
return and within 20% of the average risk would need more than 100 stocks. Campbell, Lettau,
Malkiel and Xu (2001) determine that the number of stocks needed to achieve a given level of
diversification has increased in recent years. Domian, Louton and Racine (2003) demonstrate
that investors need more than 60 stocks to avoid a significant shortfall risk, defined as the
difference between the fifth percentile of a portfolios distribution and the return from a
reference 100-stock portfolio. Milevsky (2003) considers the trade-off between the number of
stocks and the length of the holding period. Statman (2004) finds that the current optimal level of
diversification, the point where the marginal benefit is equal to the marginal cost of
diversification, exceeds 300 stocks. Shawky and Smith (2005) study the relation between
number of stock holdings and risk-adjusted returns for domestic equity mutual fund portfolios.
They find that for the majority of funds, the number of stocks held is between 40 and 120, and
appears to be driven by fund size more than by performance.
Our research examines returns and ending wealth in portfolios selected from 1,000 large
U.S. stocks. We generate probability distributions to measure the impact of varying the number
of stocks in the portfolio, an approach consistent with the recommendations of Newbould and
4
We limit our sample to securities with CRSP share type codes less than or equal to 12.
This excludes REITS, mutual funds, unit trusts, and ADRs, effectively restricting the sample to
ordinary common stocks. See section 6.1 of the Data Description Guide for the CRSP US Stock
Database for a complete description of CRSP share type codes.
4
Poon (1993, 1996) as an alternative to the Evans and Archer (1968) method. Our extension of
previous work in this area is multi-faceted. First, we consider a 20-year investment horizon,
1985 through 2004. This is considerably longer than that of any other study, including de Vassal
(2001) who uses a seven-year investment horizon. Second, we repeat our study for a different
20-year period, 1965 to 1984, as a robustness check. This ameliorates the issue of period-specific
results that Newbould and Poon identify for their own work. Third, we use a sampling technique
that deals with firm attrition over the 20-year holding period to avoid survivorship bias. Fourth,
consistent with our focus on a longer investment horizon, we measure shortfall risk relative to
the return on a risk-free asset. Fifth, we compare our results from random diversification to
portfolios diversified across industry groups. Finally, while most studies are concerned solely
with buy-and-hold strategies, we also investigate the impact of annual rebalancing.
We conclude that portfolios of eight to 20 stocks are woefully inadequate for long-term
investors who wish to outperform Treasury bonds. Based on our sample period, investors need at
least 164 stocks to have at most a 1% chance of underperforming Treasury bonds. Further, we
find that greater portfolio risk reduction is achieved through increasing the number of stocks
rather than by spreading holdings across industries.
2. Data set construction
All data are obtained from the CRSP database with the ending date December 31, 2004.
We begin by subdividing all NYSE, Amex and Nasdaq common stocks
4
active on January 1,
5
The average capitalization is $1.4 billion.
6
Exchanges cover a wide range of delisting events including exchanges of stock for cash,
exchanges of stock for shares issued by another firm, and exchanges of stock for shares listed on
another exchange.
5
1985 into 10 groups of roughly equal number, based on the first two digits of the Standard
Industry Classification codes reported by CRSP. Our initial sample consists of the100 firms from
each group with the largest market capitalization as of this date.
5
The resulting 1,000 firms
represent 82% of the market value of domestic exchange-traded stocks. This sampling approach
approximates the set of choices faced by an equity investor who wishes to achieve broad
diversification across market sectors.
Attrition in the sample is a major concern because our objective is to look at buy-and-
hold strategies over long holding periods. Over the 20-year period beginning January 1, 1985
and ending December 31, 2004, a total of 615 firms are dropped from our original 1,000 due to
delisting. Of these, 479 are merger related, 52 are exchanges,
6
11 are liquidations, 70 are
initiated by the trading exchanges--usually for performance reasons-- and three are simply
delisted without explanation. Whenever a firm is lost through delisting, we conduct a complete
search of all NYSE-, Amex- and Nasdaq-listed firms that fall in the same industry group, and are
active on the next trading date following the delisting. In keeping with our original sampling
approach, the firm with the largest market capitalization as of that date, and not already included
in the sample, is chosen as a replacement. We splice the returns for the replacement firm into the
existing series immediately following the delisting return reported for the initial firm. Delisting
day returns are included so that the full effects of cash or stock distributions received by
shareholders in mergers, exchanges, or liquidations, and/or closing sales executed at the final
listed trading price are accurately represented in the resulting data series.
7
At first glance, it seems surprising that a stock could lose an average of 30% each year
for 20 years. The worst returns are typically from series in which companies are delisted due to
financial distress. For example, suppose a $50 stock declines in value to $0.02 when the stock is
delisted, and the $0.02 is invested in a replacement stock which doubles in value over the
remainder of the 20 years to $0.04. This is an annualized return of -29.99%.
8
The 39.1% annual return series began as MGM Entertainment. That company was
replaced on March 25, 1986 by Microsoft. The 34.2% series started as UCCEL Corp. which was
replaced by Oracle on August 19, 1987.
6
To rule out survivorship bias, we do not impose any longevity constraints on our
replacement firms. As a result, further attrition is experienced among the replacement firms
themselves. In all, 293 replacement firms are lost as a result of later delisting, with 174 firms
replaced two times, 88 firms replaced three times, 24 firms replaced four times, five firms
replaced five times, one firm replaced six times, and one firm replaced seven times during the
course of our 20-year sample period. With the exception of the tenth industry group, which
includes the high-technology sector, replacements are distributed fairly evenly across groups and
years.
By splicing together returns from appropriately chosen replacement firms, we assemble a
data set consisting of 1,000 return series, each spanning 20 years and reflecting the full impact of
a long-term buy-and-hold strategy (excluding taxes and occasional trading costs arising from the
replacement of delisted firms). Throughout the remainder of the paper we refer to these 1,000
series as stocks or firms.
Almost 70% of the firms (698 out of 1,000) have annualized returns between 0% and
20%. Negative returns are reported for 246 firms, including seven below -30% per year.
7
At the
other end of the distribution, seven firms have returns above 30%. The three top performers are
Microsoft at 39.1% per year, United Health Group at 34.3%, and Oracle at 34.2%.
8
9
Results for larger portfolios of 300, 400, and 500 stocks are available from the authors.
10
We confirm this by repeating the simulations with a 999-stock sample that excludes
Microsoft. The specified bulges disappear from the resulting distributions which are available
from the authors.
7
3. Return simulations
We consider portfolios of 10, 20, 30, 50, 100, and 200 stocks, selected from the 1,000
firms in our data set.
9
We distinguish between two selection methods, random diversification,
in which the firms are randomly drawn from the entire 1,000, and industry diversification, in
which the firms are equally spread across industry groups. The sampling is performed without
replacement in both methods.
For each specified number of stocks, 1 million portfolios are formed. Figure 1 presents
the results for random diversification, in the form of probability density functions.
-----------------------
Figure 1 about here
-----------------------
Portfolios of 10, 20, and 30 stocks exhibit small bulges in the right tails of their
distributions. Microsoft, the highest returning firm, is responsible for the bulge centered just
below 25% for the 10-stock portfolio, around 21% for the 20-stock portfolio, and just below
20% for the 30-stock portfolio.
10
The bulge moves toward the left as the number of stocks is
increased because the proportional investment in Microsoft is reduced. A second bulge in the 10-
stock distribution, centered just above 20%, is primarily due to United Health Group and Oracle,
the second- and third-highest returning series.
If we are willing to assume investors prefer more to less, and are risk averse, we can rank
the portfolios based on second-order stochastic dominance. Under second-order stochastic
dominance, if the sum of the cumulative probabilities is never more with portfolio A than with
8
portfolio B, and portfolio A is sometimes less, then portfolio A stochastically dominates
portfolio B. For any two portfolio sizes that we consider, the portfolio with more stocks always
second-order stochastically dominates the portfolio with fewer stocks. For example, the 50-stock
portfolio is second-order stochastically dominated by the 100-stock portfolio which in turn is
stochastically dominated by the 200-stock portfolio. Intuitively, this means that for any given
target rate of return, the probability of being below the target declines as the number of stocks in
the portfolio increases.
4. Ending wealth
We next consider ending wealth rather than rates of return. This is helpful for interpreting
20-year results because small differences in annual return produce large differences in ending
wealth. Figure 2 shows the wealth densities expressed as ending wealth per dollar of initial
investment. These densities were converted from the return densities of Figure 1.
------------------------
Figure 2 about here
------------------------
It is clear in Figure 2 that the mode of the distribution increases with the number of
stocks. For example, the mode is between $7.50 and $7.75 for 10 stocks; it is around $9 for 20
stocks and around $13 for 200 stocks. Median wealth (which is slightly larger than the mode due
to skewness) increases monotonically as well, from $10.41 with 10 stocks to $13.60 with 200
stocks. Unlike the return distributions in Figure 1, bulges due to Microsoft, United Health Group,
and Oracle are not apparent in Figure 2 because the effects occur far out in the right tails, beyond
the highest wealth shown. With 10 stocks there is a slight bulge around $80, which disappears in
simulations drawing from 999 stocks excluding Microsoft.
9
F-tests can be used to determine the statistical significance of the variance reduction as
portfolio size is increased. When comparing two distributions, the ratio of the variances is
distributed F(
1
,
2
) under the null hypothesis of equal variances, where
1
and
2
are the degrees
of freedom for the respective sample statistics. Among any two of the portfolio sizes considered
in our study, the variance of the larger portfolio is always significantly less, at the 1% level, than
the variance of the smaller portfolio.
The wealth densities are transformed into cumulative distribution functions in Figure 3 .
We continue to study six portfolio sizes ranging from 10 to 200 stocks.
------------------------
Figure 3 about here
------------------------
To apply the Safety First criterion, a long-term U.S. Treasury bond is the appropriate
risk-free asset for the 20-year horizon. From the Ibbotson Associates SBBI data, the benchmark
20-year Treasury bond had a yield to maturity of 11.70% at the beginning of 1985. One dollar
invested at 11.70% would grow to $9.14 at the end of 20 years. The cumulative distribution
functions from Figure 3 show that 40.2% of the 10-stock portfolios underperformed the $9.14
Treasury bond wealth. This shortfall probability drops to 29.2% for 20 stocks, 22.1% for 30
stocks, 13.4% for 50 stocks, 4.3% for 100 stocks, and just 0.4% for 200 stocks.
Given the long tradition in statistics of using 1%, 5%, and 10% significance levels, we
performed additional simulations to determine the number of stocks needed to reduce the
shortfall risk to those percentages. A portfolio of 164 stocks provides a 1% chance of ending
wealth below $9.14. The portfolio must contain 93 stocks to make the shortfall risk 5%, and 63
stocks are enough to achieve a 10% shortfall risk.
Our findings make a compelling argument that 100 stocks are not enough to provide
11
However, industry diversification is usually a disadvantage at the higher percentiles,
where random portfolios could be concentrated in the best-performing industries.
10
sufficient protection from downside risk. Although this portfolio meets the Safety First criterion
at the 5% significance level, other comparisons reveal large shortfalls relative to the $13.87
mean ending wealth from 100 stocks. The 10th percentile of the distribution is $9.98, which is
more than 28% below the mean. Even the 25th percentile, at $11.35, is still 18% below the
mean. We therefore believe that the 1% significance level is more appropriate for Safety First.
5. Industry diversification
We now turn to a comparison of random diversification and industry diversification. As
noted previously, industry diversification is achieved by selecting 10% of a portfolios stocks
from each of the 10 industries. Thus, randomly drawing one stock from each industry produces a
10-stock portfolio; two stocks each for the 20-stock portfolio; and so on. Graphs of the density
functions for industry diversification are not shown because they appear identical to those for
random diversification. Comparisons are made from selected percentiles reported in Table 1.
-----------------------
Table 1 about here
-----------------------
The results reported in Table 1 indicate a modest advantage to industry diversification in
the lowest percentiles of ending wealth distributions for the smallest portfolios.
11
For example,
for portfolios with 10 stocks there is a 5% chance that ending wealth will be less than $4.49 if
random diversification is used, while the corresponding amount is $4.73 with industry
diversification. But the differences are trivial in larger portfolios. For 100 stocks at the fifth
percentile, the ending wealth amounts differ by only $0.04. Industry diversification has virtually
12
The ending wealth for selected percentiles from the 10-stock industry and 11-stock
random portfolios are as follows: 1
st
percentile ($3.34, $3.24), 5
th
($4.73, $4.72), 10
th
($5.63,
$5.66), 25
th
($7.46, $7.57), and 50
th
($10.34, $10.56).
11
no effect on portfolios with 50 stocks or more, because the random selection method almost
guarantees that these portfolios are diversified across industries.
Further, the benefits of industry diversification can be easily duplicated or exceeded by a
small increase in the number of stocks for the corresponding randomly composed portfolio.
Compared to a random portfolio of 10 stocks, the slight risk reduction of the 10-stock industry
portfolio can be matched by simply increasing the size of the random portfolio to 11 stocks.
12
Similarly, the 20-stock industry distribution nearly matches a 22-stock random portfolio, and the
30-stock industry distribution is equivalent to a 33-stock random portfolio. In each case further
increases in the size of the random portfolios provide superior risk reduction. Random portfolios
containing 12, 23, or 34 stocks are less risky than the corresponding 10-, 20-, or 30-stock
industry diversification portfolios.
6. Annual rebalancing
All of the results presented so far are for a buy-and-hold strategy. This clearly leads to a
reduction in diversification as the 20 years pass. The best-performing stocks make up an
increasingly large proportion of the portfolio value, while the worst performers shrink to small
amounts with little impact. We implement annual rebalancing to explore this issue. The
investments in each stock are adjusted at the end of each year to restore equal weighting in the
portfolio. Selected percentiles of the probability distributions are presented in Table 2.
------------------------
Table 2 about here
------------------------
13
Annual rebalancing has a similar effect on portfolios formed with industry
diversification. Now the fifth percentile for 200 stocks rises from $10.53 to $14.26, the virtually
identical increase shown above for random diversification.
14
Tables and figures are available from the authors.
15
This is, at least in part, due to the absence of any extreme returns such as those from
Microsoft, United Health Group, and Oracle in the 1985-2004 sample.
12
Annual rebalancing provides a risk reduction at the lower ends of the distributions for all
portfolios. For example, the fifth percentile of the 200-stock ending wealth distribution rises
from $10.50 to $14.22. However, this improvement may not be enough to offset taxes and
transaction costs that are inherent with rebalancing. Another disadvantage is that rebalancing
produces a wealth reduction at the 99
th
percentiles for the smallest portfolios, although risk-
averse investors should be more concerned about the lowest percentiles of the distributions.
13
7. Robustness
We repeat the analysis for the 1965-1984 period to investigate the robustness of our
results. Common stocks in the CRSP database on January 1, 1965 are divided into 10 industry
groups, and the initial 1,000-stock sample is comprised of the 100 largest firms in each group.
The same substitution algorithm is used to deal with attrition. Probability distributions are
simulated with 1 million repetitions.
14
In general, the return distributions are tighter and more symmetric and shifted left relative
to the 1985-2004 distributions.
15
For example, the 200-stock portfolio has a mean return of
10.66% and a standard deviation of 0.51% from 1965 to 1984. In contrast, the mean return is
13.98% and the standard deviation is 0.94% for the 1985-2004 period. Across all portfolio sizes,
both mean returns and standard deviations in the 1965-1984 sample are one-half to three-fourths
13
of the corresponding values in the later period.
Differences in wealth distributions are more pronounced due to the effects of
compounding. For example, the 200-stock portfolio has a mean wealth per dollar of initial
investment of $7.61 and a standard deviation of $0.71 from 1965 to 1984. In contrast, the mean
wealth is $13.87 and the standard deviation is $2.32 for the 1985-2004 period.
One interesting difference between the two periods is evident when we compare random
diversification and industry diversification. There is virtually no benefit to industry
diversification in the 1965 sample. For a portfolio size of 20, the first percentile of terminal
wealth is $3.90 with industry diversification and $3.87 with random diversification. Recall that
industry diversification leads to reductions in shortfall risks for the 1985-2004 period.
Annual rebalancing provides similar proportional advantages over a buy-and-hold
strategy in both the 1965 and 1985 samples. For the larger portfolios, the mean ending wealth for
1965 to 1984 is around $10.40 with annual rebalancing as opposed to about $7.60 for buy-and-
hold. Rebalancing takes money out of stocks with the strongest performance during the
preceding year and puts more money into the weakest. Increased ending wealth is consistent
with the market overreaction hypothesis presented by De Bondt and Thaler (1985, 1987).
The most important similarity between the two samples is the finding that effective
portfolio diversification requires more than 100 stocks. To illustrate, a 100-stock portfolio in the
1965-1984 period has a mean of $7.61 and the 10th percentile is $6.34. Thus there is a 10%
chance that ending wealth will be at least 16.7% below the mean of the distribution. Many
investors would find this unacceptable.
16
Transaction costs are obviously lower for buy-and-hold portfolios. However, they
could still be a factor in determining portfolio size.
14
8. Conclusion
Our study offers new insights into the question of how many stocks are required to
diversify a portfolio. Traditional wisdom from the 1960s and 1970s is that eight to 20 stocks are
sufficient. In contrast, we believe that even 100 are not enough. From 1985 to 2004, 25% of
randomly constructed 100-stock portfolios produced ending wealth at least 18% below the mean
stock portfolio. In accordance with the Safety First criterion, 164 stocks are needed to have a 1%
chance of underperforming Treasury bonds. These findings are consistent with the recent
Statman (2004) study.
We consider both random diversification, in which portfolios are drawn from the entire
1,000-stock sample, and industry diversification, in which the portfolio composition is equally
distributed across 10 industry groups. Industry diversification has no effect on larger portfolios,
and only a small impact on the lowest percentiles of small portfolios. In contrast, annual
rebalancing improves portfolio performance, but further research is needed to determine whether
the diversification benefits outweigh taxes and transactions costs.
16
There are many investment alternatives for those investors who feel it is too onerous to
manage a portfolio of 200 stocks. Index mutual funds typically have low annual expenses, and
recent fee reductions by Fidelity Investments could promote other reductions in this sector.
Another possibility is exchange traded funds (ETFs) which match a variety of major stock
indexes.
15
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1
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19
Annualized return in %
P
r
o
b
a
b
i
l
i
t
y
0 5 10 15 20 25 30
0.00
0.25
0.50
0.75
1.00
10 Stocks
Annualized return in %
P
r
o
b
a
b
i
l
i
t
y
0 5 10 15 20 25 30
0.00
0.25
0.50
0.75
1.00
30 Stocks
Annualized return in %
P
r
o
b
a
b
i
l
i
t
y
0 5 10 15 20 25 30
0.00
0.25
0.50
0.75
1.00
100 Stocks
Annualized return in %
P
r
o
b
a
b
i
l
i
t
y
0 5 10 15 20 25 30
0.00
0.25
0.50
0.75
1.00
20 Stocks
Annualized return in %
P
r
o
b
a
b
i
l
i
t
y
0 5 10 15 20 25 30
0.00
0.25
0.50
0.75
1.00
50 Stocks
Annualized return in %
P
r
o
b
a
b
i
l
i
t
y
0 5 10 15 20 25 30
0.00
0.25
0.50
0.75
1.00
200 Stocks

Figure 1

Return distributions for various portfolio sizes

The probability density functions shown in this figure are generated from a 1000-stock sample
consisting of the largest 100 firms by market value in each of 10 market segments spanning the
NYSE, Amex and Nasdaq. The sample period is J anuary 1985 through December 2004. Bulges
visible in the right tails of some distributions are attributable to Microsoft, United Health Group,
and Oracle, which are the three highest returning firms in our sample.
20
Wealth per dollar of initial investment
P
r
o
b
a
b
i
l
i
t
y
0 5 10 15 20 25 30
0.00
0.25
0.50
0.75
1.00
10 Stocks
Wealth per dollar of initial investment
P
r
o
b
a
b
i
l
i
t
y
0 5 10 15 20 25 30
0.00
0.25
0.50
0.75
1.00
30 Stocks
Wealth per dollar of initial investment
P
r
o
b
a
b
i
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i
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y
0 5 10 15 20 25 30
0.00
0.25
0.50
0.75
1.00
100 Stocks
Wealth per dollar of initial investment
P
r
o
b
a
b
i
l
i
t
y
0 5 10 15 20 25 30
0.00
0.25
0.50
0.75
1.00
20 Stocks
Wealth per dollar of initial investment
P
r
o
b
a
b
i
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i
t
y
0 5 10 15 20 25 30
0.00
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50 Stocks
Wealth per dollar of initial investment
P
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b
a
b
i
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i
t
y
0 5 10 15 20 25 30
0.00
0.25
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0.75
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200 Stocks

Figure 2

Ending wealth distributions for various portfolio sizes

The ending wealth distributions shown in this figure are generated from a 1000-stock sample
consisting of the largest 100 firms by market value in each of 10 market segments spanning the
NYSE, Amex and Nasdaq. Wealth per dollar of initial investment is measured at the end of the
20-year sample period which runs from J anuary 1985 through December 2004.
21
Wealth per dollar of initial investment
P
r
o
b
a
b
i
l
i
t
y
0 5 10 15 20 25 30
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
10 Stocks
20 Stocks
30 Stocks
50 Stocks
100 Stocks
200 Stocks

Figure 3

Cumulative wealth distributions.

The cumulative wealth distributions shown in this figure are generated from a 1000-stock sample
covering the period from J anuary 1985 through December 2004. Wealth per dollar of initial
investment is measured at the end of the 20-year sample period.