[Editors Note: This is a guest post from Christian Hamson. Christian is the Chief Credit Officer at NSR Invest. He has 20 years experience underwriting and building predictive models specificly for unsecured consumer installment loans. He is now using his expertise to guide the NSRInvest Fund and managed accounts.]
An important and seemingly simple question is how many loans should an investor buy to lower the variance on their expected return to a tolerable level. Part one addressed this issue using the information readily available from Lending Club and Prosper. Several blogs and other posts have also addressed this question.
A few examples of blog posts that have addressed diversification:
- Lending Robot calculates this number to be 146, using Lending Club historical data and a Monte Carlo methodology.
- Peter Renton at Lend Academy calculated a number of ~500 using Prosper data.
- Simon from LendingMemo says at least 200 is best.
What I hope to do in this post is to use traditional statistical methods to estimate the number of loans necessary for adequate diversification. [Read more…]