How many holdings is enough?
The diversification curve and the floor it cannot pass.
Interactive: how many holdings is enough?Easy
An equal-weighted basket of assets with one average volatility and one average correlation. This is the cleanest possible statement of what diversification does — and of the floor it cannot go below.
- Basket volatility
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- Removed by diversification
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- The floor
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- Effective independent bets
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- With ten more holdings
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- Reading
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Two things are worth watching. First, the marginal benefit of holding number 30 is tiny compared with holding number 3 — the curve flattens fast. Second, the floor: however many correlated assets you add, volatility converges to the average volatility times the square root of the average correlation, and no amount of counting escapes it. That floor is market risk, and diversification was never able to remove it.
The idea behind it
This calculator belongs to Diversification & Correlation, where the mechanism it computes is explained step by step, with the formula, what each input means and where the simple model stops being right. Everything is computed in your browser; nothing you type is sent anywhere.
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- Two-asset portfolio volatility — the diversification benefit, live.
- Kelly criterion — the growth-optimal stake, and why to bet less.
- Turning a pot into an income — the sustainable draw, and how much one point of return moves it.