Subjective Risk-Return Trade-off

86 Pages Posted: 5 May 2022 Last revised: 29 Nov 2023

See all articles by Chanik Jo

Chanik Jo

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Yang You

The University of Hong Kong

Date Written: November 26, 2023

Abstract

We survey 2,548 representative U.S. respondents to estimate subjective risk-return trade-offs in savings, government bonds, stocks, real estate, gold, and cryptocurrencies. We document a robust negative relationship between perceptions of risk and return among risky assets, which is universal even for wealthy respondents. Strong asset-specific preferences reflected in a large deviation of return perception from the average lead to a significant negative risk-return trade-off. Both strong optimism and pessimism contribute to negative risk-return trade-offs with similar magnitudes. Negative risk-return trade-offs translate into under-diversified portfolios, as investors avoid assets that are perceived to generate a low return and high risk.

Keywords: Surveys, Subjective Expectations, Subjective Risk Perception, Risk-Return trade-offs, Cross-section of Multi-Assets

JEL Classification: G11, G12, G50, G51

Suggested Citation

Jo, Chanik and Lin, Chen and You, Yang, Subjective Risk-Return Trade-off (November 26, 2023). Available at SSRN: https://ssrn.com/abstract=4096443 or http://dx.doi.org/10.2139/ssrn.4096443

Chanik Jo (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yang You

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, HK
China

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