The Asset Structure of Individual Portfolios and Some Implications for Utility Functions

Blume, Marshall E.; Friend, Irwin

doi:10.2307/2978737

Cited by 446 publications

(236 citation statements)

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“…Our analysis may have implications for several under-diversification puzzles in financial markets and insurance markets (see e.g., Blume and Friend, 1975, Barber and Odean, 2000, and Froot, 2001 for examples of such puzzles). For example, our analysis can be used to explain low levels of reinsurance among insurance providers in markets for catastrophe reinsurance, as shown in Ibragimov, Jaffee and Walden (2006).…”

Section: Discussionmentioning

confidence: 99%

The Limits of Diversification when Losses May be Large

Ибрагимов

Waldén

2006

SSRN Journal

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Recent results in value at risk analysis show that, for extremely heavy-tailed risks with unbounded distribution support, diversification may increase value at risk, and that generally it is difficult to construct an appropriate risk measure for such distributions. We further analyze the limitations of diversification for heavy-tailed risks. We provide additional insight in two ways. First, we show that similar nondiversification results are valid for a large class of risks with bounded support, as long as the risks are concentrated on a sufficiently large interval. The required length of the support depends on the number of risks available and on the degree of heavy-tailedness. Second, we relate the value at risk approach to more general risk frameworks. We argue that in markets for risky assets where the number of assets is limited compared with the (bounded) distribution support of the risks, unbounded heavy-tailed risks may provide a reasonable approximation. We suggest that this type of analysis may have a role in explaining various types of market failures in markets for assets with possibly large negative outcomes. JEL classification: G11Keywords: value at risk, coherent measures of risk, heavy-tailed risks, portfolios, riskiness, diversification, catastrophe insurance, risk bounds * An extended working paper version of this paper is available as . The authors are grateful to Gary Chamberlain and Oliver Hart for helpful comments and for posing questions about the stylized facts on diversification under boundedness assumptions that are answered in this paper. We also thank Donald Andrews, Donald Brown, Xavier Gabaix, Tilmann Gneiting, Dwight Jaffee, Peter Phillips, Jacob Sagi, Herbert Scarf, Martin Weitzman and the participants at seminars at the Departments of Economics at Yale University, University of British Columbia, the University of California at San Diego, Harvard University, the London School of Economics and Political Science, Massachusetts Institute of Technology, the Université de Montréal, McGill University and New York University, the Division of the Humanities and Social Sciences at California Institute of Technology, Nuffield College, University of Oxford, and the Department of Statistics at Columbia University for helpful discussions. We are grateful to Jonathan Ingersoll and David Pollard for useful discussions on extremal problems for expectations of functions of random variables with fixed moments. Finally, we thank a referee for helpful comments and suggestions.1 Tel

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Section: Discussionmentioning

confidence: 99%

The Limits of Diversification when Losses May be Large

Ибрагимов

Waldén

2006

SSRN Journal

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“…A number of empirical studies find that many individual investors hold undiversified portfolios (see e.g. Blume and Friend, 1975;Dorn and Huberman, 2002;Campbell, 2006;Goetzmann and Kumar, 2008). Moreover, it does so with reference not to theoretical portfolios of individual stocks, but to portfolios actually chosen and adjusted through time by investors, which may include directly held stocks, bonds, and mutual funds.…”

Section: The Role Of Financial Advicementioning

confidence: 99%

Financial advisors: A case of babysitters?

Hackethal

Haliassos

Jappelli

2012

Journal of Banking & Finance

351

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“…Among the various pieces of evidence are findings that households hold under-diversified portfolios (Blume and Friend, 1975;Kelly, 1995;Goetzmann and Kumar, 2008) and exhibit a strong preference for local and home country stocks (Huberman, 2001;Calvet et al, 2007). In addition, households trade too much (Odean, 1999), sell winners too early and hold losers too long (Shefrin and Statman, 1985;Odean, 1998), and they tend to buy a stock simply because it catches their attention (Barber and Odean, 2008).…”

Section: Introductionmentioning

confidence: 99%

Investment competence and advice seeking

Bachmann

Hens

2015

Journal of Behavioral and Experimental Finance

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This paper evaluates individuals' ability to avoid investment mistakes and analyzes how investment competence is related to the propensity to seek or rely on professional advice. To address these issues, we use novel survey data collected from a representative sample of Swiss households. We find that investment competence is characterized by significant age and gender gaps, and that individuals who rely less on price movements as a source of information about investments are more likely to show above-the-average investment competence. We also find that individuals with relatively extensive investment experience and those who rely relatively strongly on their own judgment in making investment decisions are more likely to make investment decisions autonomously. In addition, we find that investment competence is positively related to the demand for financial advice. Thus, it appears that the individuals who most need financial advice are those who are least likely to seek such advice and rely on it.

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The Asset Structure of Individual Portfolios and Some Implications for Utility Functions

Cited by 446 publications

References 0 publications

The Limits of Diversification when Losses May be Large

The Limits of Diversification when Losses May be Large

Financial advisors: A case of babysitters?

Investment competence and advice seeking

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