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The Portfolio Composition Effect

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  • Weber, Martin
  • Mueller-Dethard, Jan

Abstract

This study asks whether a simple, counting-based measure of performance, which is the fraction of winner stocks in a portfolio, affects people’s willingness to invest in the portfolio. We find experimental evidence that indicates that individuals allocate larger investments to portfolios with larger fractions of winner stocks, albeit alternative portfolios have realized identical overall portfolio returns and show identical expected risk-return characteristics. Building on our experimental findings, we show empirically that the proposed composition measure also matters for the demand of leading equity market index funds. A framework which combines category-based thinking and mental accounting can explain the effect.

Suggested Citation

  • Weber, Martin & Mueller-Dethard, Jan, 2020. "The Portfolio Composition Effect," CEPR Discussion Papers 15012, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15012
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    More about this item

    Keywords

    Portfolio composition; Investment behavior; Risk preferences; Mental accounting;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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