Former AQR Quant Says Wall Street Isn't Doing Portfolio Diversity Right
- Israelov shows flaw in widely accepted diversification theory
- Suggests focusing on ‘unlucky’ rather than average outcomes
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How many stocks does a portfolio need to mimic the market reliably? It’s become fashionable to say not too many: maybe as few as 30. New research claims that’s delusional.
It’s work by Roni Israelov, a former principal at AQR Capital Management and now chief investment officer for Boston-based financial services firm NDVR. After examining risk and return in model portfolios of various sizes during the 25 years through 2019, Israelov and his colleague Yin Chen found that a fully diversified portfolio needs way more stocks than people think to avoid “unlucky outcomes.”