The Return Expectations of Institutional Investors

59 Pages Posted: 6 Nov 2019

See all articles by Aleksandar Andonov

Aleksandar Andonov

University of Amsterdam

Joshua D. Rauh

Stanford Graduate School of Business; Hoover Institution; National Bureau of Economic Research (NBER)

Date Written: February 1, 2019


Analysis of newly-required disclosures on the expected returns of public pension funds across asset classes reveals that institutional investors rely on past performance in setting return expectations. These extrapolative expectations occur across all risky asset classes, operate through the expected risk premium, and affect target asset allocations. Pension funds with higher unfunded liabilities assume higher returns through higher inflation, but this relation is distinct from the extrapolative effect of past returns. Pension funds are more likely to extrapolate performance when working with certain investment consultants, and when their executives have personally experienced a longer history of performance with the fund.

Keywords: Institutional investors, return expectations, asset allocation, portfolio choice, return extrapolation

JEL Classification: G02, G11, G23, G28, H75, D83, D84

Suggested Citation

Andonov, Aleksandar and Rauh, Joshua D., The Return Expectations of Institutional Investors (February 1, 2019). Stanford University Graduate School of Business Research Paper No. 18-5; 9th Miami Behavioral Finance Conference 2018. Available at SSRN: or

Aleksandar Andonov

University of Amsterdam ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV


Joshua D. Rauh (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Hoover Institution ( email )

Stanford, CA 94305-6010
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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