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1 results

  • Portfolio Choice: Familiarity, Hedging, and Industry Bias

  • Xin Che, Andre P. Liebenberg, Andrew A. Lynch
  • Journal:
    Journal of Financial and Quantitative Analysis / Volume 56 / Issue 8 / December 2021
    Published online by Cambridge University Press:
    07 September 2020, pp. 2870-2893
    Print publication:
    December 2021

  • Investors may underdiversify their portfolios by overweighting securities in which they perceive an informational advantage or by underweighting securities to hedge risks outside the portfolio. We investigate underdiversification in institutional portfolio construction by examining the under/overweighting of industries in U.S. property–liability (PL) insurers’ equity portfolios. We find that PL insurers underweight both their own industry and highly correlated industries in their portfolios. This underweighting is larger for PL insurers exposed to higher underwriting risk. Although PL insurers have an informational advantage in investing in their peers, their underwriting risk drives them to underweight stocks in their industry.