Equity Portfolio Diversification

45 Pages Posted: 20 Dec 2001 Last revised: 26 Sep 2022

See all articles by Alok Kumar

Alok Kumar

University of Miami - Miami Herbert Business School

William N. Goetzmann

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

Multiple version iconThere are 4 versions of this paper

Date Written: December 2001


In this paper we examine the portfolios of more than 40,000 equity investment accounts from a large discount brokerage during a six year period (1991-96) in recent U.S. capital market history. Using the historical performance for the equities in these accounts, we find that a vast majority of investors in our sample are under-diversified. Even accounting for the likelihood we have selected on speculators, the magnitude of the diosyncratic risk taken by investors in our sample is surprising. Investors are aware of the benefits of diversification but they appear to adopt a 'naive' diversification strategy where they form portfolios without giving proper consideration to the correlations among the stocks. Over time, the degree of diversification among investor portfolios has improved but these improvements result primarily from changes in the correlation structure of the US equity market. Cross-sectional variations in diversification across demographic groups suggest that investors in low income and non-professional categories hold the least diversified portfolios. In addition, we find that young, active investors are over-focused and hold under-diversified portfolios. Overall, our results indicate that investors realize the benefits of diversification but they face a daunting task of 'implementing' and maintaining a well-diversified portfolio.

Suggested Citation

Kumar, Alok and Goetzmann, William N., Equity Portfolio Diversification (December 2001). NBER Working Paper No. w8686, Available at SSRN: https://ssrn.com/abstract=294735

Alok Kumar

University of Miami - Miami Herbert Business School ( email )

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Department of Finance
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HOME PAGE: http://sites.google.com/view/alokmiami/home

William N. Goetzmann (Contact Author)

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

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National Bureau of Economic Research (NBER)

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