portfolio problem --add more stock first, situation, problem, stocks

SeanWest

I have two situation, the first is I have twenty shares, but they are highly correlated,
the second is I have twenty other shars, but are low correlated with each other, compared with the first situation should i add more stocks to diversify? or should I add less stocks?

former

how you derive this formula?

kmf229

I always thought the important thing was to know how your prospective stock was correlated with all the stocks in the portfolio rather than the portfolio stocks correlation with each other…

Iginla2011

Haha yeah I think so.
linping, to answer your original question, provided that the risk profiles of the two stocks are fairly similar you would most likely always add the security with low correlation to the existing portfolio.
Add more.

thommo77

^ now I think you got this reversed. Pls clarify, what is the relationship between correlation and n? I think you need a lower correlation for diversification to be effective, and a higher n is the solution.

hardwork24

why N(number of stocks) increases with low correlation?