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).”

“A large literature shows that retail investors hold under-diversified portfolios (Goetzmann and Kumar (2008), Balasubramaniam et al. (2023)) and, even without recognizing it, tend to trade stocks that share economic links.”

“Without this broader data, the findings from existing studies may not accurately reflect the diversity of retail investors or the complexity of their decision-making processes (Goetzmann & Kumar, 2008).”

“The interplay of these biases has been extensively documented in the literature, with studies highlighting their effects on overtrading, portfolio concentration, and other detrimental behaviors (e.g., Barber and Odean 2000; Goetzmann and Kumar 2008).”

“As mentioned earlier, individual investors tend to have concentrated portfolios with few stockholdings (Goetzmann and Kumar, 2008; Ivković et al., 2008).”

“In order to evaluate diversification throughout portfolios, the Sum of Squared Portfolios Weights (SSPW) was used [27]: where, K is the total number of portfolios, the index k = 1 , 2 , 3 , ..., K stands for all the different proposed portfolios, and HHI i is the Herfindahl-Hirschman Index (HHI)…”

“Moreover, Goetzmann et al. (2008) explored the relationship between information sources and individual investors’ portfolio diversification decisions.”

“Despite that knowledge, Goetzmann and Kumar [2008] found that the individual US investors hold under-diversified portfolio which results in a welfare loss for these investors.”

“First, most individual and institutional investors have been found to have stock portfolios with only a fraction of all of the available stocks (see, e.g., Goetzmann & Kumar,2008; Griffin & Xu, 2009).”

“The top three papers in this cluster are cited by Kaniel et al. (2008); Glaser and Weber (2007) and Goetzmann and Kumar (2008) which focus on individual investor perception, IQ and overconfident trader.”

“Goetzmann and Kumar (2008) find that the intensity of reduced spreading of investment assets is prominent with less-educated, low – income, younger, and less-sophisticated investors.”

“Existing studies which investigate households’ portfolio performance (see e.g. Barber and Odean, 2000; 2001; Polkovnichenko, 2005; Goetzmann and Kumar, 2008) or compare portfolio performance according to traditional versus downside-risk measures (see e.g. Grootveld and Hallerbach, 1999; Jarrow and…”

“Educated investor diversifies his portfolio and decrease investment risk (Goetzmann & Kumar, 2008).”

“Restricting to the investment domain, which has so far been the typical focus of roboadvisors, investors have been found to display low participation (Mankiw and Zeldes, 1991), underdiversification (Grinblatt, Keloharju and Linnainmaa, 2011; Goetzmann and Kumar, 2008; Bianchi and Tallon, 2019), default bias (Benartzi…”

“There are various measures of portfolio diversification proposed in the literature; see, e.g., Rudin and Morgan (2006), Bera and Park (2008), Choueifaty and Coignard (2008), Goetzmann and Kumar (2008), or Meucci (2009).”

“, overprecise), which leads to excessive trading, under-diversification, and inflated markets (Odean, 1999; Goetzmann and Kumar, 2008; Scheinkman and Xiong, 2003).”

“According to Goetzmann and Kumar (2008), the reasoning could be related to over-confidence or investor bias for domestic investment choices.”

“Goetzmann and Kumar (2008) conclúıram que a grande maioria dos investidores possui portfólios subdiversificados e que os investidores adotam uma estratégia “ingênua” de diversificação, mesmo estando cientes dos benef́ıcios desta.”

“…portfolios display a higher trading activity (a.o. Glaser (2003), Vissing-Jorgensen (2003) and Abreu and Mendes (2012)), regardless the instruments, hold better diversified portfolios (a.o. Dorn and Huberman (2005), Guiso and Jappelli (2008), Goetzmann and Kumar (2008)) and earn higher returns.”

“Following Goetzmann and Kumar (2008), we assume that financial sophistication is correlated”

“…to invest or not, in the offering since we can assume that employees’ belonging to the same job category have similar risk preferences and a subsequent similar probability to invest whereas their portfolio’s Sharpe ratio is determined by other factors consistent with Goetzmann and Kumar (2008).”

“4 Mitton and Vorkink (2007) and Goetzmann and Kumar (2008) show undiversified investors overweight rightskewed stocks.”

“1 Several studies such as Odean (1999), Mitton and Vorkink (2007), and Goetzmann and Kumar (2008) show that investors are not well-diversified.”

“Other empirical studies investigate the effects of overconfidence on trading volume and volatility (Statman, Thorley, and Vorkink, 2006; Darrat, Zhong, and Cheng, 2007; Chuang and Lee, 2006) as well as diversification (Goetzmann and Kumar, 2008; Merkle, 2013), or try to explain the premia of various hedge portfolios u…”

“Under-diversified portfolio holdings of individual investors have been documented for instance by Mitton and Vorkink (2007) and Goetzmann and Kumar (2008); they find 19”

“It is also widely documented that individual investors hold portfolios that are under-diversified (Kelly, 1995; Mitton and Vorkink, 2007; Goetzmann and Kumar, 2008) and overweight on familiar stocks (Huberman, 2001; Ivkovic and Weisbenner, 2005; Massa and Simonov, 2006; Seasholes and Zhu, 2010).”

“Goetzmann and Kumar (2008) show that idiosyncratic risk in investor portfolios leads to a welfare loss.”

“The interested reader is directed to Goetzmann and Kumar (2008) who show that portfolio concentration is decreasing in investors’ educational level, investing experience and sophistication, and also to, Kimball and Shumway (2010) who document that the international home bias is decreasing in a number of di↵erent”

“The interested reader is directed to Goetzmann and Kumar (2008) who show that portfolio concentration is decreasing in investors’ educational level, investing experience and sophistication, and also to, Kimball and Shumway (2010) who document that the international home bias is decreasing in a number of different meas…”

“…(Fortune Magazine, November 22, 1999, “Mr. Buffett on the Stock Market”) 2 See also Feng and Seasholes (2005), Agnew (2006), Dhar and Zhu (2006), Goetzmann and Kumar (2008), Rantapuska and Knüpfer (2008), Kumar (2009b), Christelis, Jappelli, and Padula (2010), Seru, Shumway, and Stoffman…”

“This has potential benefits, such as diversification in the form of that discussed by French and Poterba (1991) and Goetzmann and Kumar (2008), through the use of ETFs and leveraged spread-betting2 through CFDs. Investing in international ETFs helps to reduce home bias (excessive investment in the…”

“[19] W.”

“Contrary to this, Goetzmann and Kumar (2007) observe”

“Several studies provide evidence in favor of the behavioral argument by showing that investors often fail to diversify (e.g., Goetzmann and Kumar, 2008), they trade too much (Odean, 1999), they exhibit a disposition effect (e.g., Barber and Odean, 1999), or they may even trade for gambling reasons…”

“The coefficients of College in both columns are positive and significant at better than 5% levels, which are consistent with the result of Goetzmann and Kumar (2008).”

“This finding is later confirmed by Goetzmann and Kumar (2002) who find a positive relationship between wealth and number of holdings.”

“…diversification is the Herfindahl-Hirschman Index (HHI) [87], which is a measure closely related to the sum of squared portfolio weights (SSPW) [88], that has been largely used as an estimator for diversification in different contexts [89], [90], [91], [92], [93], and is calculated as follows…”