The Aggregate Cost of Equity Underdiversification

24 Pages Posted: 20 May 2020

See all articles by Bjarne Florentsen

Bjarne Florentsen

Copenhagen Business School

Ulf Nielsson

Copenhagen Business School - Department of Finance

Peter Raahauge

Copenhagen Business School

Jesper Rangvid

Copenhagen Business School

Date Written: November 2019

Abstract

We analyze equity diversification of all retail investors in a country (Denmark). We find that underdiversification is pervasive. We calculate the nationwide aggregate loss due to underdiversification and express it in absolute and expected‐return terms. The aggregate loss is large. We find that investors with low education, low income, and low wealth are more likely to underdiversify. Despite better diversification, the larger fraction of the aggregate loss nevertheless adheres to the top of the income/wealth distribution. Finally, our results indicate that underdiversification arises because investors have limited information about the benefits of diversification.

Keywords: aggregate loss, investor characteristics, investor sophistication, retail investors, stock holdings, underdiversification

JEL Classification: D14, G11, G15

Suggested Citation

Florentsen, Bjarne and Nielsson, Ulf and Raahauge, Peter and Rangvid, Jesper, The Aggregate Cost of Equity Underdiversification (November 2019). Financial Review, Vol. 54, Issue 4, pp. 833-856, 2019, Available at SSRN: https://ssrn.com/abstract=3601158 or http://dx.doi.org/10.1111/fire.12212

Bjarne Florentsen (Contact Author)

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Ulf Nielsson

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Peter Raahauge

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Jesper Rangvid

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
DENMARK

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
0
Abstract Views
318
PlumX Metrics