Equity Portfolio Diversification

40 Pages Posted: 6 Dec 2004 Last revised: 12 Mar 2008

Alok Kumar

University of Miami - School of Business Administration

William N. Goetzmann

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

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Abstract

This study shows that U.S. individual investors hold under-diversified portfolios, where the level of under-diversification is greater among younger, low-income, less-educated, and less-sophisticated investors. The level of under-diversification is also correlated with investment choices that are consistent with over-confidence, trend-following behavior, and local bias. Furthermore, investors who over-weight stocks with higher volatility and higher skewness are less diversified. In contrast, there is little evidence that portfolio size or transaction costs constrains diversification. Under-diversification is costly to most investors, but a small subset of investors under-diversify because of superior information.

Keywords: Individual investors, diversification, over-confidence, trend-following behavior, local bias.

JEL Classification: G11, G12

Suggested Citation

Kumar, Alok and Goetzmann, William N., Equity Portfolio Diversification. Available at SSRN: https://ssrn.com/abstract=627321 or http://dx.doi.org/10.2139/ssrn.627321

Alok Kumar (Contact Author)

University of Miami - School of Business Administration ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

William N. Goetzmann

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

165 Whitney Ave.
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-5950 (Phone)
203-436-9252 (Fax)

HOME PAGE: http://viking.som.yale.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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