Why does junior put all his eggs in one basket? A potential rational explanation for holding concentrated portfolios

Roche, Hervé; Tompaidis, Stathis; Yang, Chunyu

doi:10.1016/j.jfineco.2013.03.016

Cited by 30 publications

(22 citation statements)

References 47 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…A number of papers have shown how standard deviations of equity portfolios can be reduced by diversification and how many randomly selected stocks are needed to eliminate idiosyncratic risks, starting with the by now famous Evans and Archer's () article, and followed by Benjelloun (), Bloomfield, Leftwich, and Long (), Campbell, Lettau, Malkiel, and Xu (), Domian, Louton, and Racine (), Elton and Gruber (), Statman (, ), and others. Suggested explanations for the underdiversification puzzle include preferences for lottery stocks (Barberis & Huang, ), margin and borrowing restrictions (Roche, Tompaidis, & Yang, ), solvency constraints (Liu, ), financial literacy (von Gaudecker, ), and other channels. But how large are the aggregate costs retail investors suffer from underdiversification?…”

Section: Introductionmentioning

confidence: 99%

The aggregate cost of equity underdiversification

Florentsen

Nielsson

Raahauge

et al. 2019

The Financial Review

View full text Add to dashboard Cite

We analyze equity diversification of all retail investors in a country (Denmark). We find that underdiversification is pervasive. We calculate the nationwide aggregate loss due to underdiversification and express it in absolute and expected‐return terms. The aggregate loss is large. We find that investors with low education, low income, and low wealth are more likely to underdiversify. Despite better diversification, the larger fraction of the aggregate loss nevertheless adheres to the top of the income/wealth distribution. Finally, our results indicate that underdiversification arises because investors have limited information about the benefits of diversification.

show abstract

Section: Introductionmentioning

confidence: 99%

The aggregate cost of equity underdiversification

Florentsen

Nielsson

Raahauge

et al. 2019

The Financial Review

View full text Add to dashboard Cite

show abstract

“…However, empirical studies which analysed household portfolios found different investors' behaviors compared to the theoretical suggestions, even if they do not arrive at a single explanation. Some of them find that diversification increases with either investor wealth or income (Kelly, 1995;Polkovnichenko, 2005;Goetzmann & Kumar, 2008), but other factors affecting investors 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).…”

Section: The Exchange Traded Funds Asset Classmentioning

confidence: 99%

Group Risk Parity Strategies for ETFs Portfolios

Kaucic¹,

Valentinuz²

2018

CBR

View full text Add to dashboard Cite

This research aims to compare different strategies that a non-professional investor in exchange-traded funds (ETFs) could employ to reach a good performance both from profits and from a risk perspective. In recent years, especially after the 2008 crisis, a new technique to evaluate the risk has become more popular, the so-called risk parity, which seeks to equalise the contributions to risk of the portfolio constituents. Our study analyses 17 variants of risk parity portfolio design for groups with the minimum variance strategy and equally weighted portfolio over a pool of 56 ETFs-listed on the Italian Stock Exchange-of eight different categories of specialisation. Empirical results confirm the usefulness of the group risk parity strategies in improving outcomes regarding diversification of risks among classes with good out-of-sample performance with respects to the target models.

show abstract

“…Results from prior research showed that income and wealth were related to portfolio allocation (Anderson, 2013;Goetzmann & Kumar, 2008;Roche, Tompaidis, & Yang, 2013) and portfolio performance (Calvet, Campbell, & Sodini, 2006). For example, Anderson (2013) discovered a positive relationship between the proportion of stocks allocated in risky assets and the level of household wealth and income.…”

Section: Economic Situationsmentioning

confidence: 99%

Use of Financial Planners and Portfolio Performance

Lei¹,

Yao²

2016

Journal of Financial Counseling and Planning

View full text Add to dashboard Cite

Using modern information economics as the conceptual framework and data from the 2013 Survey of Consumer Finances, this study adopts a decomposition technique to explore the relationship between the primary information source used by U.S. investors and their household investment portfolio performance. The sample includes households with investable assets and those whose primary information source is financial planner or self-directed sources. Households that received large amounts of inheritance or gifts within the past year are excluded from this study due to the necessity of additional planning and the associated time commitment to accomplish it. The findings reveal that investors who consult with financial planners have a higher probability of achieving better household investment portfolio performance than selfdirected investors. Results also show that household income and investor's gender mediated the effect of information source on investment portfolio performance. This study is one of the first to provide empirical evidence of a positive relationship between the service that U.S. financial planners provide and their clients' financial outcome.

show abstract

Why does junior put all his eggs in one basket? A potential rational explanation for holding concentrated portfolios

Cited by 30 publications

References 47 publications

The aggregate cost of equity underdiversification

The aggregate cost of equity underdiversification

Group Risk Parity Strategies for ETFs Portfolios

Use of Financial Planners and Portfolio Performance

Contact Info

Product

Resources

About