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Equity Portfolio Diversification

Author

Listed:
  • 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.

Suggested Citation

  • William N. Goetzmann & Alok Kumar, 2004. "Equity Portfolio Diversification," Yale School of Management Working Papers ysm17, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm17
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    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

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