Portfolio Size and Diversification Effect in Lithuanian Stock Exchange Market


  • Vilija Alekneviciene Aleksandras Stulginskis University
  • Egle Alekneviciute Aleksandras Stulginskis University
  • Rasa Rinkeviciene Vytautas Magnus University




portfolio diversification, diversification effect, number of stocks, concentration index, naive portfolio, differently-weighted portfolio, capitalization


Recently scientists have increasingly focused on measuring the effect of diversification rather than portfolio efficiency evaluation, motivating that return is more variable economic phenomenon than the risk. Portfolios in different size financial markets are formed from different numbers of stocks in order to get the same non-systemic risk elimination effect. In most cases scientists agree about naive portfolio diversification effect. Scientific debates on the measurement of diversification effect of differently-weighted stocks portfolios are still in progress. Therefore, authors of the article solve the scientific problem assessing the possibilities for diversification when portfolios are made of different weight stocks and compare the diversification effect of naive and differently-weighted stocks portfolios. The research is done in Lithuanian Stock Exchange Market and based on daily stock market prices during 2009–2010.
The research methodology is original because the selection of shares to portfolios is carried out under the following criteria in order of priority: 1) the largest negative correlation coefficient values, 2) the quantitative characteristics of the negative correlations with the other stocks in pairs, and 3) stocks of companies from different industry sectors.
The diversification effect is evaluated by three indicators: percentage of diversifiable risk elimination, depending on the number of stocks in portfolio, regressions of standard deviations of portfolios against number and concentration of stocks. The results showed that in all cases greater diversification effect is obtained in naive portfolios.

DOI: http://dx.doi.org/10.5755/j01.ee.23.4.2565

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