The aggregate cost of equity underdiversification |
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Authors: | Bjarne Florentsen Ulf Nielsson Peter Raahauge Jesper Rangvid |
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Institution: | 1. Copenhagen Business School, Frederiksberg, Denmark;2. Danish Finance Institute, Frederiksberg, Denmark;3. PerCent, Frederiksberg, Denmark;4. Reykjavík, Iceland;5. Jesper Rangvid, Copenhagen Business School, Solbjerg Pl. 3, 2000 Frederiksberg, Denmark. |
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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. |
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Keywords: | aggregate loss investor characteristics investor sophistication retail investors stock holdings underdiversification D14 G11 G15 |
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