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Equity Portfolio Diversification

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Author Info

  • William N. Goetzmann

    ()
    (Yale School of Management, International Center for Finance)

  • Alok Kumar

    ()
    (University of Notre Dame - Mendoza College of Business)

Abstract

In this paper we examine the portfolios of more than 40,000 equity investment accounts from a large discount brokerage during a six year period (1991-96) in recent U.S. capital market history. Using the historical performance for the equities in these accounts, we find that a vast majority of investors in our sample are under-diversified. A cross-sectional examination of diversification reveals that young and active investors, and investors in low income and non-professional categories hold the least diversified portfolios. Over time, the average degree of diversification has improved but these improvements result primarily from changes in the correlation structure of the US equity market. Nonetheless, improved portfolio diversification has a considerable impact on the composition and performance of investor portfolios.

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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm17.

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Date of creation: 05 Mar 2004
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Handle: RePEc:ysm:somwrk:ysm17

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Web page: http://icf.som.yale.edu/
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Related research

Keywords: Portfolio Diversification; Idiosyncratic Risk; Equity Market;

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  1. Merton, Robert C., 1987. "A simple model of capital market equilibrium with incomplete information," Working papers 1869-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Uhler, R S & Cragg, John G, 1971. "The Structure of the Asset Portfolios of Households," Review of Economic Studies, Wiley Blackwell, vol. 38(115), pages 341-57, July.
  3. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-80.
  4. Cohn, Richard A, et al, 1975. "Individual Investor Risk Aversion and Investment Portfolio Composition," Journal of Finance, American Finance Association, vol. 30(2), pages 605-20, May.
  5. Blume, Marshall E & Friend, Irwin, 1975. "The Asset Structure of Individual Portfolios and Some Implications for Utility Functions," Journal of Finance, American Finance Association, vol. 30(2), pages 585-603, May.
  6. De Bondt, Werner F. M., 1998. "A portrait of the individual investor," European Economic Review, Elsevier, vol. 42(3-5), pages 831-844, May.
  7. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06.
  8. Perraudin, William R. M. & Sorensen, Bent E., 2000. "The demand for risky assets: Sample selection and household portfolios," Journal of Econometrics, Elsevier, vol. 97(1), pages 117-144, July.
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  1. Investidor Pessoa Física
    by Roberto Ushisima in Empresas e Mercados on 2009-09-22 15:34:00
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