FIN-04-025 |
NYU Stern School of Business |
November 2004
Stijn Van Nieuwerburgh and Laura Veldkamp
ABSTRACT
Individual investors hold a fraction of their equity portfolio in a highly-diversified mutual
fund and another fraction in a small number of highly-correlated assets. Such behavior is optimal
for investors who face constraints on how much they can learn. Optimal under-diversification
arises because of increasing returns to scale in learning: As an investor holds more of an asset,
the value of learning about it increases, but as he learns more about the asset, it becomes
less risky, and more desirable to hold. The interaction of the information portfolio problem
and the asset portfolio problem causes investors to hold some fraction of their assets in a well-
diversified fund, about which they learn nothing, and to hold the other fraction in a small set
of highly-correlated assets that they learn about.
Stijn Van Nieuwerburgh
Institution: Stern School of Business, New York University
Phone: (212) 998-0673
Fax: (212) 995-4233
Email: svnieuwe@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~svnieuwe/
Laura Veldkamp
Institution: Stern School of Business, New York University
Email: lveldkam@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~lveldkam/
To download a copy of this paper click here
To request a copy of this paper click here
|