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UBC Theses and Dissertations

Portfolio diversification : a theoretical and empirical analysis Crawford, Graeme Frederick

Abstract

This thesis presents a technique for analysing the relationships between the number of securities in a diversified portfolio and portfolio return and variance of return. It includes an analytical and descriptive presentation of the concepts and objectives of portfolio analysis in a theoretical framework. The material presented is used as a vehicle to introduce an empirical analysis of the portfolio selection process. For the empirical analysis a model is developed to simulate the selection process for the optimum portfolio. This is similar to that derived by using the quadratic programming technique of the Markowitz model. The utility function used for the selection of the optimal portfolio at each stage of diversification is of the form suggested by Farrar. The ex post data for the empirical analysis consists of ten samples of fifteen securities selected from the Financial Post Data Bank and only common stock is considered. The period covered is from 1959 to 1969 using annual data. The results derived show the form of the efficient portfolio frontier under varying degrees of aversion to risk. The optimum portfolio for either a mildly risk averse or an extremely risk averse investor should consist of approximately four to six securities under the assumptions of the model.

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