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Financial Literacy and Portfolio Diversification

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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 test-based 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 Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 212.

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Date of creation: 07 Jan 2009
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Handle: RePEc:sef:csefwp:212

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Keywords: Financial literacy; Portfolio diversification;

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References

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Citations

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Cited by:
  1. Bucher-Koenen, Tabea & Ziegelmeyer, Michael, 2011. "Who lost the most? Financial literacy, cognitive abilities, and the financial crisis," Working Paper Series 1299, European Central Bank.
  2. Richard Disney & John Gathergood, . "Financial Literacy and Consumer Credit Portfolios," Discussion Papers 12/06, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  3. Jappelli, Tullio & Padula, Mario, 2011. "Investment in financial literacy and saving decisions," CFS Working Paper Series 2011/07, Center for Financial Studies (CFS).
  4. Luigi Guiso, 2010. "A trust-driven financial crisis. Implications for the future of financial markets," Economics Working Papers ECO2010/07, European University Institute.
  5. 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).
  6. Kapteyn, Arie & Teppa, Federica, 2011. "Subjective measures of risk aversion, fixed costs, and portfolio choice," Journal of Economic Psychology, Elsevier, vol. 32(4), pages 564-580, August.
  7. Renneboog, L.D.R. & Spaenjers, C., 2009. "Where Angels Fear to Trade: The Role of Religion in Household Finance," Discussion Paper 2009-018, Tilburg University, Tilburg Law and Economic Center.
  8. 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).
  9. Giofré, Maela, 2013. "International diversification: Households versus institutional investors," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 145-176.
  10. 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, vol. 0, pages 53-70, 02.
  11. Spataro, Luca & Corsini, Lorenzo, 2013. "Endogenous financial literacy, saving and stock market participation," MPRA Paper 44342, University Library of Munich, Germany.

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