Portfolio Selection of German Investors: On the Causes of Home-biased Investment Decisions

Real-world portfolio composition is often far from being mean-variance optimal. One of the phenomena documented in investment portfolios is the home-bias effect, that is, investors hold a higher-than-optimal portion of domestic assets. Analyzing hand-collected data from annual reports of German mutual funds, we find strong evidence for home-biased portfolio selection in the years 2000-2003. Besides this we document a "Europe bias," that is, equities from European countries are strongly overrepresented. Furthermore, bounded rationality of private investors appears to drive suboptimal portfolio selection. The behavior and skill of mutual fund managers seems not to influence the overall home bias.