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Equity portfolio diversification
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DOI：10.1093/rof/rfn005.png)
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Abstract
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This study shows that US. 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.
Keywords:
COMMON-STOCK INVESTMENT
ASSET PRICING MODEL
INDIVIDUAL INVESTORS
SEPARATION THEOREM
RISK
PREFERENCES
COSTS
EQUILIBRIUM
INFORMATION
PERFORMANCE
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