The Portfolio Composition Effect
75 Pages Posted: 28 Jul 2020 Last revised: 14 Jul 2021
Date Written: July 2020
This study asks whether a simple, counting-based measure of performance, which is the fraction of winner stocks in a portfolio, affects people's willingness to invest in the portfolio. We find experimental evidence that indicates that individuals allocate larger investments to portfolios with larger fractions of winner stocks, albeit alternative portfolios have realized identical overall portfolio returns and show identical expected risk-return characteristics. Building on our experimental findings, we show empirically that the proposed composition measure also matters for the demand of leading equity market index funds. A framework which combines category-based thinking and mental accounting can explain the effect.
JEL Classification: D84, G11, G12, G40
Suggested Citation: Suggested Citation