Financial Literacy and Portfolio Diversification
Title: Financial Literacy and Portfolio Diversification
Publisher: European University Institute
Series/Report no.: EUI ECO; 2008/31
In this paper we focus on poor financial literacy as one potential factor explaining lack of portfolio diversification. We use the 2007 Unicredit Customers’ Survey, which has indicators of portfolio choice, financial literacy and many demographic characteristics of investors. We first propose test-based indicators of financial literacy and document the extent of portfolio under-diversification. We find that measures of financial literacy are strongly correlated with the degree of portfolio diversification. We also compare the test-based degree of financial literacy with investors’ self-assessment of their financial knowledge, and find only a weak relation between the two measures, an issue that has gained importance after the EU Markets in Financial Instruments Directive (MIFID) has required financial institutions to rate investors’ financial sophistication through questionnaires.
Subject: Financial literacy; Portfolio diversification; E2, D8, G1
We are grateful to the Unicredit Group, and particularly to Daniele Fano and Laura Marzorati, for letting us contribute to the design and use of the UCS survey.
Type of Access: openAccess