Portfolio Choice: Familiarity, Hedging, and Industry Bias

55 Pages Posted: 7 Feb 2020 Last revised: 7 May 2020

See all articles by Xin Che

Xin Che

California State University, Fullerton

Andre P. Liebenberg

University of Mississippi - School of Business Administration

Andrew A Lynch

University of Arkansas - Sam M. Walton College of Business

Date Written: May 4, 2020

Abstract

Investors may under-diversify their portfolios by overweighting securities in which they perceive an informational advantage or by underweighting securities to hedge risks outside the portfolio. We investigate under-diversification in institutional portfolio construction by examining the under/overweighting of industries in U.S. Property-Liability (PL) insurers’ equity portfolios. We find that PL insurers underweight their own industry in their portfolios, as well as highly correlated industries. This underweighting is larger for PL insurers exposed to higher underwriting risk. While PL insurers have an informational advantage in investing in their peers, their underwriting risk drives them to underweight stocks in their industry.

Keywords: Familiarity; Hedging; Industry Bias; Under-Diversification

JEL Classification: G11, G02

Suggested Citation

Che, Xin and Liebenberg, Andre P. and Lynch, Andrew A, Portfolio Choice: Familiarity, Hedging, and Industry Bias (May 4, 2020). Available at SSRN: https://ssrn.com/abstract=3519442 or http://dx.doi.org/10.2139/ssrn.3519442

Xin Che

California State University, Fullerton ( email )

800 N State College St
Fullerton, CA 92831
United States

Andre P. Liebenberg

University of Mississippi - School of Business Administration ( email )

PO Box 3986
Oxford, MS 38677
United States

Andrew A Lynch (Contact Author)

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

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