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The aggregate cost of equity underdiversification

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Listed:
  • Bjarne Florentsen
  • Ulf Nielsson
  • Peter Raahauge
  • Jesper Rangvid

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.

Suggested Citation

  • Bjarne Florentsen & Ulf Nielsson & Peter Raahauge & Jesper Rangvid, 2019. "The aggregate cost of equity underdiversification," The Financial Review, Eastern Finance Association, vol. 54(4), pages 833-856, November.
    • Handle: RePEc:bla:finrev:v:54:y:2019:i:4:p:833-856
    DOI: 10.1111/fire.12212
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    Cited by:

    1. Raslan Alzuabi & Sarah Brown & Mark N. Harris & Karl Taylor, 2024. "Modelling the composition of household portfolios: A latent class approach," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 57(1), pages 243-275, February.
    2. Zhou, Zhongbao & Gao, Meng & Xiao, Helu & Wang, Rui & Liu, Wenbin, 2021. "Big data and portfolio optimization: A novel approach integrating DEA with multiple data sources," Omega, Elsevier, vol. 104(C).
    3. Florentsen, Bjarne & Nielsson, Ulf & Raahauge, Peter & Rangvid, Jesper, 2020. "Turning local: Home-bias dynamics of relocating foreigners," Journal of Empirical Finance, Elsevier, vol. 58(C), pages 436-452.

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