Subjective Risk-Return Trade-off
86 Pages Posted: 5 May 2022 Last revised: 29 Nov 2023
Date Written: November 26, 2023
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: Suggested Citation