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Equity Portfolio Diversification

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Author Info
Alok Kumar () (Mendoza College of Business)
William N. Goetzmann () (Yale University, School of Management)

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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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Publisher Info
Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm236.

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Date of creation: 24 Oct 2001
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Handle: RePEc:ysm:somwrk:ysm236

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Web page: http://mba.yale.edu/
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Related research
Keywords: Portfolio Diversification; Idiosyncratic Risk; Equity Market Correlation; Individual Investor Behavior;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

References listed on IDEAS
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  1. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 14(3), pages 659-80.
  2. De Bondt, Werner F. M., 1998. "A portrait of the individual investor," European Economic Review, Elsevier, vol. 42(3-5), pages 831-844, May. [Downloadable!] (restricted)
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  4. 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. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Merton, Robert C, 1987. " A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July. [Downloadable!] (restricted)
    Other versions:
  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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Scott Weisbenner & Zoran Ivkovich, 2003. "Local Does as Local Is: Information Content of the Geography of Individual Investors' Common Stock Investments," NBER Working Papers 9685, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Andreas Hackethal & Michael Haliassos & Tullio Jappelli, 2009. "Financial Advisors: A Case of Babysitters?," CFS Working Paper Series 2009/04, Center for Financial Studies. [Downloadable!]
    Other versions:
  3. Gatfaoui Hayette, 2004. "Idiosyncratic Risk, Systematic Risk and Stochastic Volatility: An Implementation of Merton’s Credit Risk Valuation," Finance 0404004, EconWPA. [Downloadable!]
  4. C. James Hueng & Ruey Yau, 2006. "Investor preferences and portfolio selection: is diversification an appropriate strategy?," Quantitative Finance, Taylor and Francis Journals, vol. 6(3), pages 255-271, June. [Downloadable!] (restricted)
  5. Glaser, Markus, 2003. "Online Broker Investors: Demographic Information, Investment Strategy, Portfolio Positions, and Trading Activity," Sonderforschungsbereich 504 Publications 03-18, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  6. Nellie Liang & Scott Weisbenner, 2002. "Investor behavior and the purchase of company stock in 401(k) plans - the importance of plan design," Finance and Economics Discussion Series 2002-36, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  7. Barbara Pfeffer, 2006. "Trade Policy and Risk Diversification," Volkswirtschaftliche Diskussionsbeitraege 126-06, Universität Siegen, Fachbereich Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht. [Downloadable!]
  8. Nellie Liang & Scott Weisbenner, 2002. "Investor Behavior and the Purchase of Company Stock in 401(k) Plans - The Importance of Plan Design," NBER Working Papers 9131, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Zoran Ivkovich & Clemens Sialm & Scott Weisbenner, 2004. "Portfolio Concentration and the Performance of Individual Investors," NBER Working Papers 10675, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Rachel A. Campbell & Roman Kräussl, 2006. "Revisiting the Home Bias Puzzle. Downside Equity Risk," CFS Working Paper Series 2006/31, Center for Financial Studies. [Downloadable!]
    Other versions:
  11. William N. Goetzmann & Massimo Massa, 2003. "Disposition Matters: Volume, Volatility and Price Impact of a Behavioral Bias," NBER Working Papers 9499, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. William N. Goetzmann & Massimo Massa & Andrei Simonov, 2004. "Portfolio Diversification and City Agglomeration," NBER Working Papers 10343, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Laura Frieder & Avanidhar Subrahmanyam, 2001. "Brand Perceptions and the Market for Common Stock," University of California at Los Angeles, Anderson Graduate School of Management 1016, Anderson Graduate School of Management, UCLA. [Downloadable!]
  14. Ridhwan, M.M. & Nijkamp, P. & Rietveld, P. & Groot, H.L.F. de, 2008. "Regional development and monetary policy : a review of the role of monetary unions, capital mobility and locational effects," Serie Research Memoranda 0007, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics. [Downloadable!]
  15. Shaneera Boolell-Gunesh, 2008. "Un portrait de l?investisseur individuel français," Working Papers of LaRGE (Laboratoire de Recherche en Gestion et Economie) 2008-12, Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg (France). [Downloadable!]
  16. Hayette Gatfaoui, 2004. "Idiosyncratic Risk, Systematic Risk and Stochastic Volatility: An Implementation of Merton's Credit Risk Valuation," Research Paper Series 123, Quantitative Finance Research Centre, University of Technology, Sydney.
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