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Financial Literacy and Portfolio Diversification

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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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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Find related papers by JEL classification:
  • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
  • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
  • G1 - Financial Economics - - General Financial Markets

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  1. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2007. "Financial Literacy and Stock Market Participation," CeRP Working Papers 66, Center for Research on Pensions and Welfare Policies, Turin (Italy).
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Cited by:

  1. Bucher-Koenen, Tabea & Lamla, Bettina, 2014. "The Long Shadow of Socialism: On East-West German Differences in Financial Literacy," MEA discussion paper series 14282, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  2. Jappelli, Tullio & Padula, Mario, 2011. "Investment in Financial Literacy and Saving Decisions," CEPR Discussion Papers 8220, C.E.P.R. Discussion Papers.
  3. 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.
  4. Spataro, Luca & Corsini, Lorenzo, 2013. "Endogenous financial literacy, saving and stock market participation," MPRA Paper 44342, University Library of Munich, Germany.
  5. 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).
  6. Disney, Richard & Gathergood, John, 2013. "Financial literacy and consumer credit portfolios," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2246-2254.
  7. repec:dgr:kubcen:200934 is not listed on IDEAS
  8. Udichibarna Bose & Ronald MacDonald & Serafeim Tsoukas, 2014. "The role of education in equity portfolios during the recent financial crisis," Working Papers 2014_18, Business School - Economics, University of Glasgow.
  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. Bucher-Koenen, Tabea & Lamla, Bettina, 2014. "The long Shadow of Socialism: On East-West German Differences in Financial Literacy," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100585, Verein für Socialpolitik / German Economic Association.
  11. 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.
  12. Brown, Martin & Stix, Helmut, 2014. "The Euroization of Bank Deposits in Eastern Europe," Working Papers on Finance 1412, University of St. Gallen, School of Finance.
  13. Luigi Guiso, 2010. "A trust-driven financial crisis. Implications for the future of financial markets," Economics Working Papers ECO2010/07, European University Institute.
  14. 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.
  15. 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).
  16. Elsa Fornero & Maria Cristina Rossi & Maria Cesira Urzì Brancati, 2011. "Explaining why, right or wrong, (Italian) households do not like reverse mortgages," CeRP Working Papers 123, Center for Research on Pensions and Welfare Policies, Turin (Italy).

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