The effect of information quality on optimal portfolio choice

Frederik Lundtofte*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

11 Citations (Scopus)


Three types of agents acting on different information sets are considered: fully informed agents, insiders, and outsiders. Differences in information quality are shown to affect the properties of their optimal portfolios. For an outsider, the share of wealth invested in the stock is decreasing in the variance of the stock. However, for an insider, the effect of an increasing stock variance on the optimal portfolio weight is ambiguous. In a calibration to U.S. data, the confidence intervals of the insider’s demand for the stock converge, whereas the outsider’s confidence intervals become wider.

Original languageEnglish
JournalFinancial Review
Issue number2
Pages (from-to)157-185
Number of pages29
Publication statusPublished - May 2006
Externally publishedYes


  • C13
  • Estimation risk
  • G11
  • Hedging demands
  • Incomplete information
  • Learning
  • Portfolio choice


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