lendingclub the diversification benefit

Investment diversification concept is not new. Like old saying: never put all eggs in one basket, it is never a good idea to invest one loan on lendingclub platform.  As the platform allows $25 investment piece, diversification can be achieved with a small amount of investment.

Figure below illustrated histogram of ROI of one note on lendingclub platform.  As typical fixed income investment, the ROI has a long loss tail.  Specifically, you have 10% chance of  losing more than 35% of your investment.

On the other hand, if you invest 100 loans, the distribution looks more symmetric.

If you invest 1000 loans, the distribution is even narrower (e.g. less chance of losing significant amount.)

Mathematically, it is well known the Central limit theory at work.

After illustrating this simple concept, I really like to ask a question: how much should an investor be compensated on concentrated risk investment?  Here is an example: I've seem on folio a loan with outstanding principal of more than $5000 listed for sell at a discount of about 4%. Is 4% discount enough to compensate for risk concentration? Would I rather invest 200 loans with $25 a piece with a smaller discounts? I'll discuss this problem in later posts.