Two central themes in asset pricing theory are how averse households are to taking on risks, and how willing they are to substitute consumption over time in response to the incentives provided by asset returns. These issues are central to understanding both asset returns and consumption patterns. Most work in this field operates on the basic observation that not all households invest in the stock market. Studies that account for market segmentation assume that all stockholders hold a financial index (S&P, NYSE) and use one of these indexes as a proxy for household-specific portfolio. According to the latest data from the 2004 Survey of Consumer Finances, however, the median US stockholders who own stocks directly hold only 3 stock securities. Another data observation from the SCF (and other sources) is that stockholders with different wealth levels have different returns on their stocks. These data observations call into question the validity of financial index as a proper proxy for household-specific portfolio.

This research starts from the two basic observations that most stockholders hold only a few individual stocks and stockholders with different wealth levels have a different rate of return on their stocks. If a large fraction of households do not hold a financial index, then how does that affect our inference about households' willingness to substitute consumption over time for the incentives provided by asset returns and to accept risks? Furthermore, what does it teach us about what a good model of assets prices looks like? And why do households hold only a few individual stocks?

My research addresses these issues. Specifically, in the first chapter I study the heterogeneity in households' portfolio choice and performance and find that the trade-offs between average payoffs and risk alone cannot explain heterogeneity in portfolio returns. In the second section, I address a long-standing question in macroeconomics and finance- the value of the risk aversion for households with different wealth levels. In the third chapter, I study the effect of political affiliation on portfolio choice.