Working Paper: NBER ID: w10675
Authors: Zoran Ivković; Clemens Sialm; Scott Weisbenner
Abstract: Using data on the investments a large number of individual investors made through a discount broker from 1991 to 1996, we find that the stock trades by households with concentrated portfolios outperform those with diversified portfolios. While in general the stocks bought by individual investors significantly underperform the stocks they sell, the reverse is true for households whose holdings are concentrated in a few stocks. The excess return of concentrated relative to diversified portfolios is stronger for households with large account balances as well as for stocks not included in the S&P 500 Index and local stocks, potentially reflecting concentrated investors' successful exploitation of information asymmetries. This finding is very robust to alternative concentration measures and regression specifications, and to alternative explanations such as differences across concentrated and diversified investors in the portfolio turnover and access to inside information, suggesting that some of these concentrated households have superior information processing skills. Moreover, controlling for a household's average investment ability, the household's trades perform better as the household's portfolio includes fewer stocks. However, while concentrated household portfolios on average outperform diversified ones, their levels of total risk are larger and the Sharpe ratios of their stock portfolios are lower.
Keywords: Portfolio Concentration; Individual Investors; Performance; Behavioral Finance; Information Asymmetries
JEL Codes: D82; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Concentrated portfolios (G11) | Outperform diversified portfolios (G11) |
| Concentrated investors (G19) | Superior stock-picking abilities (G11) |
| Access to favorable information (D83) | Outperformance of concentrated investors (G11) |
| Households with large account balances (D14) | Outperformance of concentrated investors (G11) |
| Concentrated portfolios (G11) | Larger total risk (D81) |
| Concentrated portfolios (G11) | Lower Sharpe ratios (G40) |
| Informational asymmetries (D82) | Outperformance of concentrated investors (G11) |