Equity Portfolio Diversification

“First, investors could ignore correlations (e.g., Kroll et al., 1988; Kroll and Levy, 1992) if they adopt the availability heuristics (Tversky and Kahneman, 1973) or follow price trends (e.g., Odean, 1999; Dhar and Kumar, 2001).”

“There is evidence of suboptimal financial decisionmaking due to excessive trading (Barber & Odean, 2001; Deaves, Lüders, & Luo, 2009), to under-diversification (Goetzmann & Kumar, 2008) and over-investment (Harvey, Ben-David, & Graham, 2007).”

“results in excessive trading, and Goetzmann and Kumar (2008) find that overconfidence results in investors holding under-diversified portfolios.”

“Guiso et al. (2003) find that different religious denominations have different economic beliefs.”

“1 Because many individual investors hold under-diversified portfolios (e.g., Blume and Friend (1975) and Goetzmann and Kumar (2008)), Merton’s conjecture may be economically important and has inspired intensive empirical research.”

“…see Odean (1999), Barber and Odean (2000, 2001), Gervais and Odean (2001), Feng and Seasholes (2005), Dhar and Zhu (2006), Chen et al (2007), Goetzmann and Kumar (2008), Nicolosi et al (2009) and Seru et al (2010), among others. analysis to only those investors with both positive…”

“Goetzmann and Kumar (2008) show that typical portfolio volatility is unnecessarily high because the correlation among the assets held exceeds the value that would result from randomly selected assets.”

“Studies of portfolios of investors (e.g. Kelly 1995; Goetzmann and Kumar 2001) suggest that many individual investors hold quite undiversified portfolios.”

“25 Goetzmann and Kumar (2008) to compute the risk reduction that can be accomplished through the diversification alternatives relative to the average asset.”

“Thus, this paper can also help explain why investors with a diversified retirement portfolio underdiversify in the directly held portfolio (e.g., Goetzmann and Kumar (2008), Polkovnichenko (2005)).14 I adopt the same setup as before but assume that an investor owns one unit of a nontradable asset,…”

“1 Empirical studies show that households hold under-diversified and home-biased portfolios (Blume and Friend, 1975; Calvet et al., 2007; Goetzmann and Kumar, 2008; Huberman, 2001; Kelly, 1995); are prone to availability and familiarity heuristics (Barber and Odean, 2008), trade too much (Odean, 1999), sell winners too…”

“Large FIB levels could simply reflect a sense of unfamiliarity with non-domestic stocks, which investors might systematically perceive as being riskier than home-country equity (see, for instance, Goetzman and Kumar, 2008).”

“Given that individual investors are largely undiversified (Goetzmann and Kumar, 2008), it is important to understand the determinants of this risk – social capital, in our setting.”

“Among various pieces of evidence are findings that households hold under-diversified portfolios (Blume and Friend, 1975; Goetzmann and Kumar, 2008; Kelly, 1995) and exhibit a strong preference for local and home country stocks (Calvet et al.”

“For example, Huberman (2001) argues that there is a high propensity to invest in “familiar” financial assets: such assets give the investor the illusion to control his own investments better than in other cases (see also Goetzmann & Kumar, 2002; Kelly, 1995).”

“2See Barber and Odean (2000), Polkovnichenko (2005), and Goetzmann and Kumar (2008).”

“Furthermore, [27] investigated herding behavior in stock markets and found that this bias intensifies during periods of high uncertainty or market turbulence, suggesting that emotional reactions play a crucial role in herding [28].”

“…Agren (2006); Back, Crane, and Crotty (2018); Barberis and Huang (2008); Barberis, Harvey, and Shephard (2016); Boyer, Mitton, and Vorkink (2010); Goetzmann and Kumar (2008); Hagestande and Wittussen (2016); Heuson, Hutchinson, and Kumar (2020); Kumar (2009); Maringer and Parpas (2009); Mitton…”

“Goetzmann and Kumar (2008) analyse under-diversification of investors and find that investors tend to hold portfolios that are highly volatile and consist of stocks that are more highly correlated than one would expect when stocks were chosen randomly.”

“Supporting this underdiversification argument, Goetzman and Kumar ( 2008 ) study a sample of more than 62 000 household investors during 1991–1996 and show that over 25% of the investor portfolios have only one stock, over 50% of the investor portfolios do not have more than three stocks, and only 5–10% of them have m…”

“As for other control variables, Gruber (1996) and Del Guercio and Tkac (2002) find that fund flows are highly autocorrelated, Chevalier and Ellison (1997) and Sirri and Tufano (1998) both find that mutual fund investors flock to funds with the highest recent”

“Goetzmann and Kumar (2008) show that individuals who hold undiversified portfolios hold stocks with high levels of skewness, and Bailey, Kumar, and Ng (2011) show that individual investors also tend to choose mutual funds that hold stocks with high levels of skewness.”

“…, Choe , kho and Stultz (1999) , Barber and Odeon( 2000, 2001,2005) , Grinblatt and Keloparju (2000) Coval, Hirschleifer and Smway(2002) , Goetzmann and Kumar (2008) , Griffin, Harris and Topalogu (2003) , Jackson (2003) , Andrade, Change and Seasholes(2005), Barber et al (2005) ,…”

“This local-bias, which is a more granular version of the international home equity bias (French and Poterba (1991)), appears in many countries even as investors do not get rewarded for holding such concentrated local stock portfolios (Grinblatt and Keloharju (2001), Seasholes and Zhu (2010)). Studies typically assign…”

“However, for various reasons, such portfolios are often poorly diversified (Goetzman and Kumar 2008).”

“The characteristics of the investor might influence how they trade and what they learn (Abreu & Mendes, 2012) and are affected by their surrounding environment (Goetzmann & Kumar, 2008).”

“1 See, for example, Cheffins (2010) and Rutterford and Sotiropoulos (2016).”

“Finally, Goetzmann and Kumar (2008) found that personal retirement accounts tend to be less diversified than non-retirement accounts.”

“Goetzmann and Kumar (2008) find that more than 25% of investors hold a single stock in their portfolios and less than 10% of retail investors' portfolios contain more than 10 stocks.”

“In line with previous studies of the US financial markets (see, e.g., Polkovnichenko 2005; Goetzman and Kumar 2008), we document low levels of portfolio diversification across all investor classes.”

“Goetzmann and Kumar (2008) argues that while investors are aware of the benefits of diversity, they build portfolios without properly taking the correlations into account.”

“Investing and portfolio theory emphasizes diversification, but empirically there is a large gap between these theoretical recommendations and how retail investors actually invest [8, 27].”

“Guiso and Jappelli (2005) and Georgarakos and Pasini (2011) show that mutual fund investment is itself predicted by the degree of an investors’ social interactions.”

“In a recent study, for example, Ackert et al. (2015) nd that investors who diversify more in an experimental asset market appear more overcon - dent in the IP which is at odds with previous ndings (e.g. Goetzmann and Kumar, 2008).”

“Goetzmann and Kumar [ 2008 ] study more than 40,000 stock accounts at a brokerage firm in the 1991–1996 period and find that the mean and median number of stocks in a portfolio, respectively, were four and three.”

“These findings are in line with several country-level studies (Grinblatt and Keloharju, 2001; Goetzmann and Kumar, 2008).”

“Others also argue that individual traders overinvest in stocks because they are familiar with them (or love gambling), leading to under-diversification (Goetzmann and Kumar, 2008) and average or even below-par returns (Anderson, 2013).”

“Goetzmann and Kumar (2008) conclude that overconfidence is related to underdiversification.”

“Further, Shum and Faig (2006) find a positive relationship between income and the likelihood of holding equity, and Goetzmann and Kumar (2008) find a positive relationship between income and equity holding sophistication.”

“Analysis from a brokerage - tor sophistication (Goetzmann & Kumar, 2008), and their young adults are most at-risk of being unable to afford retirement expenses in comparison to other generations (Hicken, 2013).”

“Goetzmann and Kumar (2008), however, examine more than 60,000 equity investment accounts from 1991 to 1996 and find that less than ten percent of the investors hold more than ten stocks.”

“The conventional financial principle is not yet able to explain why investors opt to maintain losers longer and sell winners quicker (Odean, 1999; Tversky & Kahneman, 1974), tend to comply with the glide of facts (Tan et al., 2008), and are not varied (Goetzmann & Kumar, 2008).”

“of the orderings) identifies univocally portfolio diversification and it is not satisfied by the diversification measures proposed in the literature (see, among others, Polkovnichenko (2005), Goetzmann and Kumar (2008)).”

“Lastly, we assess the diversification of the portfolios through the average Herfindahl-Hirschman index (HHI) - here we follow Goetzmann and Kumar (2008):”

“Goetzmann and Kumar (2001) found that the degree of diversification is higher for old investors than for young ones.”