The aggregate cost of equity underdiversification

Bjarne Florentsen, Ulf Nielsson, Peter Raahauge and Jesper Rangvid

The Financial Review, 2019, vol. 54, issue 4, 833-856

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.

Date: 2019
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