Equity Portfolio Diversification

This study shows that U.S. individual investors hold under-diversified portfolios, where the level of under-diversification is greater among younger, low-income, less-educated, and less-sophisticated investors. The level of under-diversification is also correlated with investment choices that are co...

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Bibliographic Details
Published in:Review of Finance 2008-01, Vol.12 (3), p.433-463
Main Authors: Goetzmann, William N., Kumar, Alok
Format: Article
Language:English
Subjects:
Behavior
Correlation analysis
Diversification
Investment policy
Investors
Portfolio diversification
Studies
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Summary:This study shows that U.S. individual investors hold under-diversified portfolios, where the level of under-diversification is greater among younger, low-income, less-educated, and less-sophisticated investors. The level of under-diversification is also correlated with investment choices that are consistent with over-confidence, trend-following behavior, and local bias. Furthermore, investors who over-weight stocks with higher volatility and higher skewness are less diversified. In contrast, there is little evidence that portfolio size or transaction costs constrains diversification. Under-diversification is costly to most investors, but a small subset of investors under-diversify because of superior information.
ISSN:1572-3097
1573-692X
1875-824X
DOI:10.1093/rof/rfn005