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Shouldn't all eggs be putted in one basket? A portfolio model based on investor sentiment and inertial thinking

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  • Xie, Jun
  • Yang, Chunpeng

Abstract

In the portfolio choice literatures and the financial market, diversification and concentration are the focus of debate of philosophers. In this paper, we develop a model of portfolio choice to integrate the diversification strategy and the concentration strategy. Our model relies on the concepts of investor sentiment and inertial thinking. The results show that: Generally, when the level of sentiment is relatively low, an investor who is affected by sentiment and inertial thinking may do a well-diversified investment the same as the rational investor. When the level of sentiment is high enough, the investment strategies including diversification and concentration are complex and volatile. Quantitative results for either diversification or concentration investment are given for all cases in the paper.

Suggested Citation

  • Xie, Jun & Yang, Chunpeng, 2013. "Shouldn't all eggs be putted in one basket? A portfolio model based on investor sentiment and inertial thinking," Economic Modelling, Elsevier, vol. 35(C), pages 682-688.
    • Handle: RePEc:eee:ecmode:v:35:y:2013:i:c:p:682-688
    DOI: 10.1016/j.econmod.2013.08.030
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    More about this item

    Keywords

    Investor sentiment; Inertial thinking; Investment portfolio; Behavioral finance;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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