Can you be too diversified in mutual funds? : an honors thesis [(HONRS 499)]

Abstract

As the old saying goes, don't put all your eggs in one basket. When it comes to money the reason for this is that individual companies may fail; certain business sectors may thrive because of economic conditions that make others suffer; and different types of investments may react to the same market forces. The question is, can you avoid some if not all of these risks? The answer is yes. Through the use of portfolio diversification many of these risks can be minimized, but not all avoided. A simple way to diversify is to buy mutual funds, where your money is pooled with that of other investors and used to buy a basket of diverse stocks. The next question is what is the right amount of diversification? How many funds should you own? Can you be over-diversified in mutual funds? I will explore these questions in the following paper.