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Financial Literacy and Portfolio Diversification

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  • Luigi Guiso

    (European University Institute, EIEF and CEPR)

  • Tullio Jappelli

    (University of Naples Federico II, CSEF and CEPR)

Abstract

In this paper we focus on poor financial literacy as one potential factor explaining lack of portfolio diversification. We use the 2007 Unicredit Customers’ Survey, which has indicators of portfolio choice, financial literacy and many demographic characteristics of investors. We first propose test-based indicators of financial literacy and document the extent of portfolio under-diversification. We find that measures of financial literacy are strongly correlated with the degree of portfolio diversification. We also compare the testbased degree of financial literacy with investors’ self-assessment of their financial knowledge, and find only a weak relation between the two measures, an issue that has gained importance after the EU Markets in Financial Instruments Directive (MIFID) has required financial institutions to rate investors’ financial sophistication through questionnaires.

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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 0812.

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Length: 36 pages
Date of creation: 2008
Date of revision: Oct 2008
Handle: RePEc:eie:wpaper:0812

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References

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Citations

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Cited by:
  1. Renneboog, L.D.R. & Spaenjers, C., 2009. "Where Angels Fear to Trade: The Role of Religion in Household Finance," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2009-018, Tilburg University, Tilburg Law and Economic Center.
  2. Jappelli, Tullio & Padula, Mario, 2011. "Investment in Financial Literacy and Saving Decisions," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8220, C.E.P.R. Discussion Papers.
  3. M. A. Milioli & L. Poletti & B. Ronchini, 2011. "L’educazione finanziaria degli studenti universitari: misurazione e analisi delle determinanti," Economics Department Working Papers 2011-EF01, Department of Economics, Parma University (Italy).
  4. Giancarlo Corsetti & Michael P. Devereux & Luigi Guiso & John Hassler & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2010. "Chapter 2: A trust-driven financial crisis," EEAG Report on the European Economy, CESifo Group Munich, CESifo Group Munich, vol. 0, pages 53-70, 02.
  5. Bucher-Koenen, Tabea & Ziegelmeyer, Michael, 2011. "Who lost the most? Financial literacy, cognitive abilities, and the financial crisis," Working Paper Series, European Central Bank 1299, European Central Bank.
  6. Luigi Guiso, 2010. "A Trust-driven Financial Crisis.Implications for the Future of Financial Markets," EIEF Working Papers Series 1006, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2010.
  7. Arie Kapteyn & Federica Teppa, 2009. "Subjective Measures of Risk Aversion, Fixed Costs, and Portfolio Choice," DNB Working Papers, Netherlands Central Bank, Research Department 216, Netherlands Central Bank, Research Department.
  8. Giofré, Maela, 2013. "International diversification: Households versus institutional investors," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 26(C), pages 145-176.
  9. Elsa Fornero & Chiara Monticone & Serena Trucchi, 2011. "The effect of financial literacy on mortgage choices," CeRP Working Papers 121, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  10. Spataro, Luca & Corsini, Lorenzo, 2013. "Endogenous financial literacy, saving and stock market participation," MPRA Paper 44342, University Library of Munich, Germany.
  11. Disney, Richard & Gathergood, John, 2013. "Financial literacy and consumer credit portfolios," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(7), pages 2246-2254.
  12. Elsa Fornero & Maria Cristina Rossi & Maria Cesira Urzì Brancati, 2011. "Explaining why, right or wrong, (Italian) households do not like reverse mortgages," CeRP Working Papers 123, Center for Research on Pensions and Welfare Policies, Turin (Italy).

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