The Portfolio Composition Effect

73 Pages Posted: 28 Oct 2022 Last revised: 7 Nov 2022

See all articles by Jan Müller-Dethard

Jan Müller-Dethard

University of Mannheim

Martin Weber

University of Mannheim - Department of Banking and Finance

Pascal Kieren

Heidelberg University - Alfred Weber Institute for Economics

Multiple version iconThere are 3 versions of this paper

Date Written: November 5, 2022

Abstract

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.

Suggested Citation

Müller-Dethard, Jan and Weber, Martin and Kieren, Pascal, The Portfolio Composition Effect (November 5, 2022). Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2022, Available at SSRN: https://ssrn.com/abstract=4260870 or http://dx.doi.org/10.2139/ssrn.4260870

Jan Müller-Dethard

University of Mannheim ( email )

Department of Finance, L9, 1-2
Mannheim, 68131
Germany

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

Pascal Kieren (Contact Author)

Heidelberg University - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

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