Citation

Discussion Paper Details

Please find the details for DP15012 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: The Portfolio Composition Effect

Author(s): Jan Mueller-Dethard and Martin Weber

Publication Date: July 2020

Keyword(s): investment behavior, Mental accounting, Portfolio composition and risk preferences

Programme Area(s): Financial Economics

Abstract: Does the evaluation of a portfolio of stocks depend on its composition of winner and loser stocks? To test this, we define a simple, counting-based measure of performance - the number of winner relative to the number of loser stocks in a portfolio - and examine how this composition measure affects individuals' willingness to invest in a portfolio. We derive testable predictions for the proposed composition measure from a framework which combines category-based thinking with mental accounting. Consistent with our predictions, we find across all experiments that individuals allocate larger investments to portfolios with more winner than loser stocks relative to alternative portfolios with more loser than winner stocks, although both portfolios (1) have realized identical overall portfolio returns and (2) show identical expected risk-return characteristics. Building on our experimental findings, we analyze fund flows of exchange-traded funds on leading equity market indices. We identify that the proposed portfolio composition measure is positively related to future net fund flows.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15012

Bibliographic Reference

Mueller-Dethard, J and Weber, M. 2020. 'The Portfolio Composition Effect'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15012