The Aggregate Cost of Equity Underdiversification

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Abstract

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.
Original languageEnglish
JournalThe Financial Review
Volume54
Issue number4
Pages (from-to)833-856
Number of pages24
ISSN0732-8516
DOIs
Publication statusPublished - Nov 2019

Keywords

  • Aggregate loss
  • Investor characteristics
  • Investor sophistication
  • Retail investors
  • Stock holdings
  • Underdiversification

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