Equity Portfolio Diversification

Review of Finance, Forthcoming

Posted: 14 Jan 2008

See all articles by William N. Goetzmann

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Alok Kumar

University of Miami - School of Business Administration

Multiple version iconThere are 4 versions of this paper


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 diversification is constrained by portfolio size or transaction costs. Under-diversification is costly to most investors, except for a small subset of investors who under-diversify because of superior information.

Keywords: Individual investors, diversification, local bias, over-confidence, trend-following behavior

JEL Classification: G11, G12

Suggested Citation

Goetzmann, William N. and Kumar, Alok, Equity Portfolio Diversification. Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1081787

William N. Goetzmann

Yale School of Management - International Center for Finance ( email )

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HOME PAGE: http://viking.som.yale.edu

National Bureau of Economic Research (NBER)

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Alok Kumar (Contact Author)

University of Miami - School of Business Administration ( email )

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Department of Finance
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United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

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