Financial Literacy, Behavioral Biases and Investor’s Portfolio Diversification: Empirical Study of an Emerging Stock Market

Abstract

The purpose of this study is to check the impact of financial literacy and behavioral biases on investor’s portfolio diversification. Data were collected through questionnaire using sample size of 181 investors trading in Pakistan Stock Market. The results indicate that financial literacy has insignificant and positive influence on investor’s portfolio diversification, behavioral biases such as familiarity and availability biases have insignificant and negative while overconfidence bias has significant negative impact on investor’s portfolio diversification. Portfolio size also has significant positive impact on portfolio diversification. The findings suggest the implemenation of financial literacy programs to facilitate the investors, trading in different stocks. The implications for practice were discussed in detail.