Information costs and portfolio selection

This paper examines the relationship between perceived information costs and expected returns, expected range of returns, ownership and sources of information for a group of affluent investors in a multi-market setting (across a variety of investments). Findings show that investors expect excess returns and greater risk in areas characterized by high information costs and that ownership is more limited (less diversified) in these investment areas. Additionally, the involvement of certain types of advisors (information sources) substantially increases information costs.