The Effect of Financial Literacy on Portfolio Diversification

Abstract

This paper examines the relationship between financial literacy (both objective and subjective) and portfolio diversification. We have found that individuals with higher objective financial literacy are more likely to diversify their assets. In addition, those with higher objective financial literacy and higher subjective financial literacy are more likely to diversify their assets. Furthermore, based on the theory of planned behavior, we analyzed the pathways through which financial literacy affects portfolio diversification. Our findings demonstrated that subjective financial literacy affects portfolio diversification intentions and behavior through attitudes toward portfolio diversification, subjective norms (i.e., the thoughts and behavior of those around them), and behavioral control. In contrast, objective financial literacy affects portfolio diversification intentions and behavior only through attitudes and behavioral control.