Financial Literacy and Portfolio Diversification

Luigi Guiso () and Tullio Jappelli ()

No ECO2008/31, Economics Working Papers from European University Institute

Abstract: In this paper we focus on poor financial literacy as one potential factor explaining lack of portfolio diversification. We use the 2007 Unicredit Customers' Survey, which has indicators of portfolio choice, financial literacy and many demographic characteristics of investors. We first propose test-based indicators of financial literacy and document the extent of portfolio under-diversification. We find that measures of financial literacy are strongly correlated with the degree of portfolio diversification. We also compare the test-based degree of financial literacy with investors' self-assessment of their financial knowledge, and find only a weak relation between the two measures, an issue that has gained importance after the EU Markets in Financial Instruments Directive (MIFID) has required financial institutions to rate investors' financial sophistication through questionnaires.

Keywords: Financial literacy; Portfolio diversification (search for similar items in EconPapers)
JEL-codes: E2 D8 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec
Date: 2008
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Working Paper: Financial Literacy and Portfolio Diversification (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:eui:euiwps:eco2008/31

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