Investment Portfolios in an Emerging Economy: What Drives Portfolio’s Diversification?

Pedro Luiz Albertin Bono Milan,William Eid Jr

doi:10.5195/emaj.2017.120

Pedro Luiz Albertin Bono Milan, William Eid Jr

Open Access

https://doi.org/10.5195/emaj.2017.120

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Abstract

This study sheds light on the investment portfolio’s decisions through behavioral insights. The study intends to identify personal characteristics that drive the level of diversification and lead investors to allocate resources in risky assets in an emergent economy, deepening the discussion about investment decisions and bringing some behavioral insights to the debate. The study has a unique and heterogeneous database of individual financial allocations from Brazil, one of the largest emergent economies. The characteristics of Brazilian investors play an important role in investment decisions, high educated and married investors tend to display diversified portfolios. To invest in risky assets, male investors have a 43% greater likelihood of investing in risky assets than females, highlighting the discussion on gender and investment decisions. Moreover, married investors tend to exhibit conservative portfolios. We observed that traditional investors are under-diversified, allocating primarily in traditional and safety assets. The results suggest that the investment decisions can be subject to psychological biases defined in behavioral finance theory.

Highlights

The growth of the financial market in recent years has led to greater availability of financial products and services in order to meet a new range of customers and investors
The main objective of our study is to analyze how Brazilian investors are investing their financial resources among several possibilities available in the market and to seek the factors that can influence the level of portfolio diversification and the financial allocation in risky assets
The black vertical bars represent non-financial investments and the gray vertical bars represent financial investments. This empirical study examines the level of portfolio diversification of Brazilian investors, focused on aspects that can influence portfolio diversification and the intrinsic characteristics that can lead investors to allocate financial resources in risky assets, furthering the discussion on the investment decisions within an emerging economic context

Summary

Introduction

The growth of the financial market in recent years has led to greater availability of financial products and services in order to meet a new range of customers and investors. A pioneering study from 1979 states that financial decisions based on emotions or psychological influences can lead investors to allocate their financial resources in higher-risk investments and underdiversified portfolios (Kahneman and Tversky, 1979). Considering the size and sophistication of the financial market in Brazil, it is important to analyze what drives investment decisions to provide new subsidies to improve the financial education process of Brazilians and provide new tools for market participants to develop better products for investors In this context, the main objective of our study is to analyze how Brazilian investors are investing their financial resources among several possibilities available in the market and to seek the factors that can influence the level of portfolio diversification and the financial allocation in risky assets. The level of portfolio diversification follows Equation (1) and Equation (2):

Diversification Metrics

Metrics of Investment in Risky Assets

Findings

Conclusion