Expectations of Risk and Return Among Household Investors: Are Their Sharpe Ratios Countercyclical?

43 Pages Posted: 15 Jan 2009 Last revised: 10 May 2009

Gene Amromin

Federal Reserve Bank of Chicago

Steven A. Sharpe

Federal Reserve Board - Research & Statistics

Date Written: February 20, 2009

Abstract

Data obtained from special questions on a series of Michigan Surveys of Consumer Attitudes are used to analyze stock market beliefs and portfolio choices of household investors. We find that expected risk and returns are strongly influenced by expected economic conditions. When investors believe macroeconomic conditions are more expansionary, they tend to expect both higher returns and lower volatility. This finding is sharply at odds with the canonical view that stock market returns should compensate investors for exposure to macroeconomic risks. We further find that perceived risk in equity returns (though not the expected returns) is strongly influenced by a number of well-documented behavioral biases. The relevance of investors’ reported expectations is supported by the finding that portfolio equity positions tend to be higher for those respondents that anticipate higher expected returns and lower uncertainty.

Keywords: Equity premium, investor survey, investor expectations, time-varying expected returns

JEL Classification: G28

Suggested Citation

Amromin, Gene and Sharpe, Steven A., Expectations of Risk and Return Among Household Investors: Are Their Sharpe Ratios Countercyclical? (February 20, 2009). Available at SSRN: https://ssrn.com/abstract=1327134 or http://dx.doi.org/10.2139/ssrn.1327134

Gene Amromin

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
230 S. LaSalle
Chicago, IL 60604
United States
3123225368 (Phone)
3123226011 (Fax)

Steven A. Sharpe (Contact Author)

Federal Reserve Board - Research & Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2875 (Phone)
202-452-3819 (Fax)

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