Alphamont believes an equal weight portfolio of 35-40 stocks reduces unsystematic risk sufficiently, while still being invested in few enough stocks for portfolio returns to deviate from market index returns. As more stocks are added to an equal weight portfolio the reduction in portfolio variance (risk) reduces exponentially, as you can see in the chart below. It is for this reason that Alphamont is comfortable holding only 35-40 stocks in its model and managed portfolios.
EQUAL WEIGHT N-STOCK PORTFOLIO VARIANCE SYSTEMATIC AND UNSYSTEMATIC SPLIT WITH SAME INDIVIDUAL STOCK VARIANCES & CORRELATION COEFFICIENTS OF 0.25
In the PDF below, the math behind the chart above is outlined.
Chart Excel Source [Downloadable File]