Limits of diversification
The point past which adding names barely reduces portfolio dispersion: issuer-specific risk has already been cancelled and what is common to all of them remains in full.
Formula
\sigma_p^2 = \frac{\bar{\sigma}^2}{n} + \frac{n-1}{n}\,\overline{\mathrm{Cov}}As the number of holdings grows the first term tends to zero and the second to the average covariance. That average is the risk a longer list cannot remove.
How to read the number
The value of a new holding is decided by how weakly it is related to what is already there, not by the length of the list.
When the metric lies
A basket of many names from one sector or one country looks diversified and is not: the average covariance inside such a group is high.
Also known as: diversification limit