Diversification and the Efficient Market Hypothesis in Investments

Abstract

The growth in the number of individual investors in B3, rising from 700,000 to 6.2 million between 2018 and 2022, has increased the demand for knowledge about effective financial strategies. In this context, diversification, a key concept in financial theory, stands out as a fundamental strategy for mitigating risks and ensuring more stable returns. This study examines the impact of diversification and the Efficient Market Hypothesis (EMH) on equity investments in Brazil using data from "Google Finance". Random portfolios were constructed and evaluated over different time horizons (2, 5, and 10 years), comparing them to the Ibovespa and Ifix indices. The results indicate that increasing the number of assets in a portfolio reduces risk without compromising expected returns, demonstrating the effectiveness of diversification in optimizing the risk-return trade-off. This finding suggests that investors who choose not to diversify their portfolios are exposed to non-compensated market risks, reinforcing the importance of diversification as a strategy to maximize return potential while minimizing associated risks.