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At 08:36 PM 4/21/2008, Mark Johnson wrote:
>Bob, you've made an assumption: that transaction
>costs increase linearly with the number of tradeable
>instruments in the portfolio. This assumption isn't
>true in all cases. For example it isn't true in my
>case.
I was using "transaction cost" in a more general sense - including the effort of analyzing, thinking about, placing orders, commissions, slippage, checking for fills, entering stops, chances for making mistakes, doing the accounting, filling out the tax returns, etc.
You are correct on the commissions. They would tend to be related to the account size. And I know that you have automated much of the rest of the process.
My point was that the benefit of diversification increased as the square root of the number of markets and the general transaction costs tend to increase more directly so that there should be an optimum number above which the costs go up faster than the benefits. It is not a major factor, however.
Bob Fulks
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