Consistency of Diversification Patterns with Investors’ Risk Attitudes: Evidence from German Household Portfolios

Nataliya Barasinska, Dorothea Schäfer and Andreas Stephan
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Nataliya Barasinska: DIW Berlin and European University Viadrina, Frankfurt(Oder)

No 2010-4, JIBS Working Papers from Jönköping International Business School

Abstract: This paper explores the relationship between self-declared risk aversion of private investors and their willingness to hold diversified portfolios of financial assets. The analysis is based on household survey data from the German Socioeconomic Panel (SOEP) that provides a reliable measure of individual attitudes towards financial risk. Our findings suggest that more risk averse households tend to hold incomplete portfolios consisting mainly of a few risk free assets. We also find that the propensity to diversify is highly dependent on whether liquidity and safety needs are satisfied. We conclude from this evidence that households consider absence of liquidity and safety as opportunity cost of diversification that overcompensates the advantage of a possible overall reduction in investment risk.

Keywords: private households; financial behavior; portfolio diversification; risk aversion (search for similar items in EconPapers)
Pages: 30 pages
Date: 2010-11-17
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Persistent link: https://EconPapers.repec.org/RePEc:hhb:hjacfi:2010_004

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