Unit Trusts in Singapore: Degree of Diversification

Abstract

This study examines the degree of diversification of the funds in Singapore. The R-square statistic was employed as a measure for the degree of diversification. The findings generally indicated that the local funds were not well-diversified. Various explanations are given to account for this low level of diversification, as indicated by a low R-square statistic. This study also addresses some definitional and conceptual issues relating to diversification that affect the propriety of using the R-square statistic as a measure of diversification. More specifically, Markowitz’s Modern Portfolio Theory is introduced to illustrate the difference between naive and efficient diversification.