Financial Literacy and Portfolio Diversity in China

This study documents the effect of financial literacy on the portfolio diversity of family wealth in China with a two-way, fixed-effect model. The results show that most people in China do not have sufficient financial literacy to understand financial assets, which implies a lack of financial knowledge in China. It also looks into the determinants of holding each financial asset, no matter how high- or low-risk, which has not been fully explored in the existing literature. The empirical results found that the knowledge of portfolio diversity increases according to their levels of education and financial literacy. In addition, people living in urban areas diversify their portfolios more than in rural areas. People with high financial literacy understand the value of time (interest); therefore, they prefer to have portfolios that evaluate time and avoid options that do not (cash). We also found that people’s characteristics in risk significantly affect whether they hold stock, mutual funds, or other financial assets.