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).”

“Our choice of the coefficient of risk aversion agrees with Goetzmann and Kumar (2008) who find that an average investor holds a stock portfolio with an average size of approximately $36 000.”

“(2005) and Goetzmann and Kumar (2008), among others, has shown that investor sophistication”

“Goetzmann and Kumar (2008) found that individual investors who are younger and poorer tend to hold more under-diversified portfolios, suggesting that they may exhibit stronger cognitive biases due to their demographic characteristics.”

“Graham et al. (2011) survey over 600 executives and report that both the tax payments and the financial accounting costs associated with repatriating indefinitely reinvested foreign earnings are important when determining whether to repatriate.”

“[5], savings [47], preparing for your golden years [68], participation in the stock market [6], borrowings [43]; diversification of risk [28], [30]; management of finances [21], [17], [33], etc.”

“Diversification spreads investments across di ff erent assets to mitigate individual asset volatility [19].”

“In addition, high-IQ investors are less biased in their investment decision-making (Grinblatt et al., 2012), while wealthier and better educated households tend to be better diversified (Goetzmann and Kumar, 2008) and to exhibit less inertia (Bilias, et al., 2010).”

“For instance, studies have used the number of stocks in a portfolio to distinguish between diversification and concentration, and thresholds of 3, 11 to 15, or 30 have been proposed (e.g., Statman 1987; Goetzmann and Kumar 2008; Ivković et al. 2008).”

“LITERATURE REVIEW Findings of many studies, such as Barber and Odean (2000), Benartzi and Thaler (2001), Campbell et al. (2001), and Goetzmann and Kumar (2008), suggest that investors do not achieve efficient diversification for their portfolios, since they hold only few assets.”

“In finance, overprecision is responsible for an under-diversification of portfolios (Goetzmann and Kumar, 2008), for excessive trading (Barber and Odean, 2001), and for systematic forecasting errors (Deaves et al.”

“In the existing literature, investors are proved to generally chase the market trends in stock market, which is often considered to be lack of investment experience (Barber and Odean 2008; Bilias, Georgarakos, and Haliassos 2010; Goetzmann and Kumar 2008).”

“This behaviour is attributed to a tendency for investors to prefer stocks with lottery-like features (e.g., large positive daily returns) and a tendency to under-diversify (e.g., Barber and Odean, 2000; Polkovnichenko, 2005; Goetzmann and Kumar, 2008).”

“Aside from their aggressive orders as mentioned in the previous subsection, a large proportion of the individual investors are undiversified, and the extent of under-diversification is greater for investors who hold only retirement accounts [68].”

“In a similar study, Goetzmann and Kumar (2008) concluded that young, low-income, and low-educated individual investors were inadequate in portfolio diversification in the US.”

“…who tend to commit systematic mistakes under the influence of psychological biases, such as sellingwinners and holding losers (Grinblatt and Keloharju, 2001), buying attention-grabbing stocks (Barber and Odean, 2008), and constructing undiversified stock portfolios (Goetzmann and Kumar, 2008).”

“…literacy (Van Rooij et al. 2011), precautionary behavior (Dynan 1993, Giesbert et al. 2011), perceived control over future events (Bauman and Sims 1978, Goetzmann and Kumar 2008), consumer (over)confidence (Sandroni and Squintani 2007), and peer influence (Friedl et al. 2014, Beshears et al. 2015).”

“Overconcentration to safe asset is considered dangerous anomalies in financial market, resulting in lower equity premium (Goetzmann & Kumar, 2008; Sunden & Surette, 1998).”

“‖ The idea is consistent with Goetzmann and Kumar (2008) in the sense that the high volatility and high skewness in stock prices disturb the portfolio diversification.”

“Many important insights have been found by empirical studies that analyze actual trades of individual investors (see, e.g. Barber and Odean, 2008; Barber et al., 2009; Chang et al., 2016; Goetzmann and Kumar, 2008; Grinblatt and Keloharju, 2001).”

“…of perceived private information (Benos (1998); Odean (1998); Gervais and Odean (2001)), and is often cited as an explanation for household under-diversification (Christelis, Jappelli, and Padula (2010); Goetzmann and Kumar (2008); Odean (1999); Barber and Odean (2001); Anderson (2013)).”

“Barber and Odean (2000) and Goetzman and Kumar (2008) report similar findings of underdiversification based on data for individual investors at a U.S. brokerage firm.”

“Handa and Linn [1993] investigate the effects of the parameter uncertainty on the APT and conclude that securities with a higher uncertainty have a higher systematic risk.”

“According to Graham (2006), a prominent figure among investors, character is a critical prerequisite for success in value investing.”

“In line with previous studies (e.g., Barber and Odean, 2000; Faccio et al., 2011; Goetzmann and Kumar, 2008; Karhunen and Keloharju, 2001), the main measure of portfolio diversification is the total number of equity positions that the Largest Ultimate Shareholder holds directly and indirectly…”

“λ =[3 4 6 9 10 11 12]”

“Using the same dataset as this paper, Goetzmann and Kumar (2008) find that the level of portfolio diversification is related to investor sophistication.”

“This observation is consistent with Goyal and Santa-Clara’s (2003) finding that idiosyncratic risk component has a lower degree of measurement error than market risk.”

“…portfolio for several reasons such as a) transactions costs (Ang et al., 2006), b) investor preferences heterogeneity (e.g., preferences for stocks with higher volatility) (Goetzmann & Kumar, 2008) c) financial constraint (Xu & Malkiel, 2003), d) background risk as in (Heaton and Lucas, 2000), etc.”

“…behavioral bias leads to trading loss, and includes a disposition effect (Odean, 1998), overtrading (Barber & Odean, 2000), underdiversification (Goetzmann & Kumar, 2008), attention-grabbing trades (Seasholes & Wu, 2007; Barber et al., 2021), overextrapolation bias (Greenwood & Shleifer, 2014;…”

“Portfolio size can be a proxy for investor sophistication: more sophisticated investors hold larger portfolios and succumb less to behavioral biases (Goetzmann and Kumar, 2008).”

“…to the descriptive model, the normative model of traditional finance theory suggests that investors are perfectly rational and thus are not influenced by the psychological process such as affect, cognition, and heuristics (e.g., Campbell, 2006; Goetzmann & Kumar, 2008; Polkovnichenko, 2005).”

“Goetzman and Kumar (2008) found that 25% of investors hold only one stock, and 50% of investor portfolios contained less than 3 stocks while less that 10% of their portfolios contain less than 10 stocks.”

“There was only one study (Goetzmann & Kumar, 2008) found that spoke specifically to blue-collar worker investment portfolio diversification, and they found that blue-collar workers were in the category possessing the least diversified portfolio.”

“More recently, this number appears to increase to about four [Barber and Odean (2000) and Goetzmann and Kumar (2008)].16 In our baseline calibration, each investor makes four stock picks, and we find that on average, 99% of investors end up holding four different stocks.”

“(15) to examine the relation between fund return skewness change and the value-weighted coskewness of stocks purchased by fund managers after mid-year.”

“However, Goetzmann and Kumar (2001) show the existence of many under-diversified portfolios.”

“Consequently, most individual investors hold underdiversified portfolios (Goetzmann & Kumar, 2008) and trade more frequently (Barber & Odean, 2000; Graham et al., 2009).”

“We sample monthly snapshots at the first day of each calendar month, matching the literature [20] and balancing resolution against compute.”

“This is because they are more diversified (Goetzmann and Kumar 2008), and investors allocate more to assets that reduce the overall portfolio variance.”

“Social trading portfolios more strongly represent typical characteristics of the trading behavior of over-confident investors, such as higher risk, lower diversification, and higher activity (Goetzmann and Kumar 2008; Nosić and Weber 2010; Odean1998 ).”

“Moreover, noise investors refrain from closing losing positions whereas they jump quickly on cashing the winning ones (Jackson 2003) and tend to undiversify (Goetzmann and Kumar 2002).”