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Portfolio Diversification, Proximity Investment and City Agglomeration

  • WILLIAM N. GOETZMANN

    ()

    (Yale School of Management - International Center for Finance)

  • MASSIMO MASSA

    ()

    (INSEAD - Department of Finance)

  • ANDREI SIMONOV

    ()

    (Stockholm School of Economics - Department of Finance)

We study the puzzle of portfolio underdiversification and proximity investment from a novel perspective, linking it to the process of urbanization. We find that urban portfolios are more focused - i.e., less diversified and more concentrated in 'close' stocks. We explain it in terms of the process of 'professional specialization' that characterizes urban environments. We test this against a number of alternative theories: financial sophistication, social competition and hedging non-financial risk. We show that the very same factors behind the drive to city agglomeration also affect both the degree of portfolio diversification and proximity investing by influencing investor information and risk.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm452.

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Date of creation: 14 Apr 2005
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Handle: RePEc:ysm:somwrk:ysm452
Contact details of provider: Web page: http://icf.som.yale.edu/

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