Portfolio Concentration and the Performance of Individual Investors
Michigan State University, Department of Finance
University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER)
Scott J. Weisbenner
University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER)
AFA 2006 Boston Meetings
Journal of Financial and Quantitative Analysis, Forthcoming
This paper tests whether information advantages help explain why some individual investors concentrate their stock portfolios in a few stocks. Stock investments made by households that choose to concentrate their brokerage accounts in a few stocks outperform those made by households with more diversified accounts (especially among those with large portfolios). Excess returns of concentrated relative to diversified portfolios are stronger for stocks not included in the S&P 500 index and local stocks, potentially reflecting concentrated investors' successful exploitation of information asymmetries. Controlling for households' average investment abilities, their trades and holdings perform better when their portfolios include fewer stocks.
Number of Pages in PDF File: 60
Keywords: Portfolio choice, concentration, diversification
JEL Classification: G11, G14
Date posted: March 7, 2005
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