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Are information and portfolio diversification substitutes or complements?

Author

Listed:
  • Elisa Luciano
  • Antonella Tolomeo

Abstract

Whenever a new financial product is offered by the financial industry, a rational investor faces a trade off between diversification benefits and costs of \getting to know" the newly introduced asset. In this paper the investor who can diversify can also decide either to pay a fee and separate the information on different risks affecting his asset value, or to remain uninformed and receive a non-separating signal. The uninformed investor optimally filters his pooled signal. The paper provides conditions under which diversification benefits are exploited, with or without information acquisition. We discuss lack of diversification and under-diversification and provide conditions under which each of them applies.

Suggested Citation

  • Elisa Luciano & Antonella Tolomeo, 2016. "Are information and portfolio diversification substitutes or complements?," Carlo Alberto Notebooks 456, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:456
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Information costs; Optimal filtering; Portfolio diversification;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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