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The Effect of Diversification on Risk
W. H. Wagner and S. C. Lau
Financial Analysts Journal
Vol. 27, No. 6 (Nov. - Dec., 1971), pp. 48-53
Published by: CFA Institute
Stable URL: http://www.jstor.org/stable/4470866
Page Count: 6
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In a rising market, average return increases as the quality of individual issues declines. On the other hand, whereas the level of return variability falls as the number of issues held in a portfolio increases, average return is unaffected. Hence the investor is better off holding a large number of low quality stocks than a smaller number of high quality stocks; return on the former portfolio will be higher for a given level of over-all price variability.
Financial Analysts Journal © 1971 CFA Institute