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).”

“3 Given the implications of portfolio underdiversification, a number of studies have examined its determinants (e.g., Gaudecker, 2015; Goetzmann and Kumar, 2008; Calvet et al., 2007; Roche et al., 2013).”

“The literature provides many examples of poor decision making, such as excessive trading, sell winning investments while holding losing investments, tendency to buy popular stocks at over-price and hold undiversified stock portfolios (Odean, 1999; Barber, Odean & Zhu, 2008; Goetzmann & Kumar, 2008).”

“However, several studies (Blume and Friend 1975; Goetzmann and Kumar 2008; Ortobelli et al.”

“If investors concentrate in firms or industries because of overconfidence (Goetzmann and Kumar, 2008), we would generally expect no significant association between industry-specific”

“Goetzmann and Kumar (2008) found a 2.4% yearly return difference between the least and the best diversified investors in the same data.”

“Goetzmann and Kumar (2008) found that individual investors tend to have under-diversified portfolios: These are mostly young, low income, and inexperienced investors.”

“…to the recommendations of standard financial theory, empirical studies show that less experienced investors typically hold undiversified portfolios (Goetzmann and Kumar 2008), trade too much (Barber and Odean 2000), and exhibit gambling behaviors when investing in financial assets (Sjöberg and…”

“However, Goetzmann and Kumar (2008), after studying the diversification behaviour of about sixty thousand investors of the U.”

“Anderson (2007) and Goetzmann and Kumar (2008) tie individual investor portfolio diversification together by documenting that lower-income, poorer, younger, and less well-educated investors invest a greater proportion of their wealth in individual stocks, hold more highly concentrated portfolios,…”

“Based on 40,000 stock accounts at a brokerage firm, Goetzmann and Kumar (2008) find that the median number of stocks in a portfolio of individual investors is three in the 1991-1996 period.”

“Goetzmann and Kumar (2008) shows that based on a sample of 62,000 household U.S investors in the 1991-1996 period, more than 25% of investors only have one stock, more than 50% have no more than three shares, and less than 10% of investors has more than 10 shares.”

“…about financial markets (Guiso & Jappelli, 2006), and commit biased behaviors (Kahneman, Knetsch, & Thaler, 1991), and trade excessively (Barber & Odean, 2001), which in turn leads to poor financial decision-making (for example, Campbell, 2006; Goetzmann & Kumar, 2008; Polkovnichenko, 2005).”

“…behaviours could be age, financial sophistication, size of the account balance, portfolio size, labour income, and the ratio of current wealth to income (Calvet, Campbell, & Sodini, 2007; Ivković, Sialm, & Weisbenner, 2008; Goetzmann & Kumar 2008; Kumar, 2009; Roche, Tompaidis, & Yang, 2013).”

“…were found to more frequently participate in the stock market (van Rooij, Lusardi, and Alessie, 2011), to hold better diversified portfolios2 (Goetzmann and Kumar, 2008; Guiso and Jappelli, 2008) and to be more likely to plan for retirement (Bucher-Koenen and Lusardi, 2011; van Rooij,…”

“Goetzman and Kumar (2008) proved that US investors own collections of low diversity securities, so that the level of diversification is lower for younger investors with lower income, less education, and less experience. Peng and Xiong (2005) stated that investors tend to process markets and segments information rather…”

“Goetzmann & Kumar (2008) pesquisaram o mercado dos E.U.”

“Goetzmann and Kumar (2008) examine a sample of 40,000 investors from 1991 to 1996 and observe that most of them are under-diversified and seem to give little importance to correlation among stocks.”

“LITERATURE REVIEW Diversification is a fundamental principle in finance, which aims at minimizing the risk faced by investors (Gaudecker, 2015; Amenc and Martellini, 2011; Goetzmann and Kumar, 2008; De Santis and Gerard, 1997; Meric and Meric, 1989; Klein and Bawa, 1976; Lessard, 1973).”

“…conducting this analysis is to use trading data from discount brokers, as done in other studies that focus on individual investor trading behavior (e.g., Odean (1998), Barber and Odean (1999), Odean (1999), Barber and Odean (2000), Barber and Odean (2001), Kumar and Goetzmann (2008), Kumar (2009)).”

“Although different trading behavior of RI between socio-demographic groups (Goetzmann and Kumar, 2008) and personal capabilities (Grinblatt et al.”

“The average stock investor holds only a handful of stocks in his portfolio (Gerhardt & Meyer, 2013; Goetzmann & Kumar, 2008) and is heavily influenced by behavioral biases (Mouna & Anis, 2015).”

“For example, individual investors tend to hold very small portfolios—only 3-4 stocks, i.e., underdiversification (see, for example, Goetzmann and Kumar (2008)), or they choose not to participate in the stock market, i.e., limited market participation (see, for example, Guo (2004) and Bogan (2008)).”

“…Cheng and Liang (2000), Dynkin, Hyman and Konstantinovsky (2002), Gomes and Livdan (2004), Polkovnichenko (2005), McClatchey and Vandenhul (2005), Frederik (2006), Bera and Park (2008), Goetzmann and Kumar (2008), Polbennikov, Desclee and Hyman (2010), Mainik and Ruschendorf (2010), Ghosh (2010).”

“Specifically, results on stock skewness are conflicting with contributes of Mitton and Vorkink (2007) and Goetzmann and Kumar (2008) who show that more under- diversified portfolios tend to overweight specific stocks and industries with”

“Note that upon inversion, (17) implies that at a constant risk level p, the loss level s changes as follows”

“In today’s research, some authors have looked at the lack of fully diversified portfolios as a source for excess returns, as real- life investors often hold underdiversified portfolios in which idiosyncratic risk cannot completely be eliminated (Goetzmann & Kumar, 2008; Levy, 1978).”

“In other words, in addition to cognitive abilities (Korniotis and Kumar 2008), financial sophistication and behavioral biases (Goetzmann and Kumar 2008), and investor resourcefulness (Ivkovich et al. 2008), I show that mental health is another explanatory variable for portfolio diversification…”

“in reality, investors’ portfolios rarely contain greater than ten (Goetzmann and Kumar [2002]).”

“Barber and Odean (2000) argue investors trade too aggressively and earn poor returns as a result.”

“Goetzmann and Kumar (2008) and Korniotis and Kumar (2008a, 2008b) infer the education level of investors from their zip code.”

“949.(8) The average (median) total risk of these firms measured as annualized standard deviation is 67.”

“For instance, Goetzmann and Kumar (2008) show that, based on a sample of more than 62,000 household investors in the period from 1991 to 1996, over 25 % of the investor portfolios contained only one stock, over half contained no more than three stocks, and less than 10 % contained more than ten…”

“However, evidence from many countries indicates that individual investors often fail to diversify their portfolios adequately (Goetzmann & Kumar 2001; Guiso et al. 2002).”

“Familiarity bias and overconfidence (Goetzmann & Kumar, 2008) cause over-diversification, which leads to extremely high portfolio risk for very low returns.”

“Goetzmann & Kumar [35] developed equity portfolio diversification, where the study provides the portfolios of over 40,000 stock investment accounts from a sizable discount brokerage over six years in the recent history of the US capital market.”

“Utilizing data from a bro-kerage firm with more than 40,000 stock accounts from 1991 to 1996, Goetzmann and Kumar (2008) found that the mean number of stocks in a portfolio was four and the median was three.”

“They often attribute their investment success to their own skills, leading them to trade more actively, which in turn raises trading volumes, created short-term momentum [8, 25, 105] and results in lack of diversification [41].”