Even if individual risk is the same for each stock on average, that risk may play out very differently for each individual stocks. Two bets where you both have 50% chance of losing money, might play out in such a way that in one bet you might lose entire money and in other you won’t. You diversify to minimise the effect of probabilities on your return. A 50 stock portfolio therefore, as a whole, has lower overall risk (or less variance) than a 10 stock portfolio, if all stocks has similar risk/reward potential.
Where the mistake lies is diversification for the sake of diversification. What people do is compromise with their risk/ reward potential in order to diversify, and unknowingly make the portfolio worse. Finding stocks/bets with similar risk reward potential is hard, and takes enormous work, and the more work you do, the more you can afford to diversify and thereby reduce variance in your portfolio returns.
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