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This paper explores the relationship between the risk attitude and the diversification of assets in household portfolios. The first part examines the impact of manifested risk aversion on the total number of distinct assets held in a portfolio (naive diversification). The second part focuses on a more sophisticated strategy of diversification and asks whether financial theory is compatible with the observed diversification patterns. Based on the German Socioeconomic Panel which provides unique measures for the propensity to take risks in general and in case of investing money, the results of the regression analysis show that along with some socioeconomic characteristics the propensity of taking investment risks is an important predictor for the household's conducted diversification strategy. However, some of our findings are strongly at odds with what the concept of mean-variance utility suggests. JEL: D14, G11
Abstract
Do Risk Attitude and Household Portfolio Diversification Match? Evidence from German Households' Portfolios
Barasinska, Nataliya; Schäfer, Dorothea; Stephan, AndreasThis paper explores the relationship between the risk attitude and the diversification of assets in household portfolios. The first part examines the impact of manifested risk aversion on the total number of distinct assets held in a portfolio (naive diversification). The second part focuses on a more sophisticated strategy of diversification and asks whether financial theory is compatible with the observed diversification patterns. Based on the German Socioeconomic Panel which provides unique measures for the propensity to take risks in general and in case of investing money, the results of the regression analysis show that along with some socioeconomic characteristics the propensity of taking investment risks is an important predictor for the household's conducted diversification strategy. However, some of our findings are strongly at odds with what the concept of mean-variance utility suggests. JEL: D14, G11