Holding a significant amount of a portfolio in one or more individual stocks subjects the portfolio to the unique risks of that company. Sudden events such as the revelation of faulty products (Volkswagen), large-scale accidents (BP), or market dynamics like platform shifts and growth challenges (Groupon) can lead to sharp declines in individual stock prices, even in an otherwise rising market.
Modern Portfolio Theory, and specifically the Capital Asset Pricing Model (CAPM), asserts that this concentrated allocation is an uncompensated risk (i.e., it does not result in a higher expected return) and is therefore unnecessary. Research shows investors can minimize the company-specific risk of individual stocks by investing in 50 or more different issuers, provided the portfolio is not concentrated in any one of these stocks and each holding is relatively uncorrelated.
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