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Information Acquisition and Portfolio Performance

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Abstract

Rational investors perceive correctly the value of financial information. Investment in information is therefore rewarded with a higher Sharpe ratio. Overconfident investors overstate the quality of their own information, and thus attain a lower Sharpe ratio. We contrast the implications of the two models using a unique survey of customers of an Italian leading bank with portfolio data and measures of financial information. We find that the portfolio Sharpe ratio is negatively associated with investment in information. The negative correlation is stronger for men than women and for those who claim they know stocks well, arguably because these investors are more likely to be overconfident. We also show that investment in information is associated with more frequent trading, less delegation of portfolio decisions and less diversified portfolios. In each case, the effect of information is stronger for investors who, a priori, are suspected to be more overconfident.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 167.

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Date of creation: 01 Oct 2006
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Handle: RePEc:sef:csefwp:167

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Keywords: Portfolio Choice; Rationality; Overconfidence; Behavioral Finance;

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  1. Counterproductive knowledge
    by chris dillow in Stumbling and Mumbling on 2007-11-21 11:41:55
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