The Subjective Risk and Return Expectations of Institutional Investors

109 Pages Posted: 25 May 2023 Last revised: 10 Dec 2024

See all articles by Spencer J. Couts

Spencer J. Couts

University of Southern California - Sol Price School of Public Policy; USC Lusk Center of Real Estate

Andrei S. Gonçalves

Ohio State University (OSU) - Fisher College of Business

Johnathan Loudis

University of Notre Dame - Mendoza College of Business

Date Written: January 5, 2024

Abstract

We use the long-term Capital Market Assumptions of major asset managers and institutional investor consultants from 1987 to 2022 to study their subjective risk and return expectations across 19 asset classes. We find a strong and positive subjective risk-return tradeoff, with the vast majority of the variability in subjective expected returns coming from subjective risk premia (compensation for market beta) rather than subjective alphas. Belief variation and the positive risk-return tradeoff are both stronger across asset classes than across institutions, underscoring the need to study subjective beliefs across multiple asset classes. We also show that subjective expected returns aggregated across institutions predict future realized returns across asset classes and over time, with most of this predictability driven by subjective risk premia, not alphas. Overall, our findings suggest it is important to include a strong risk premia component when modeling the subjective return expectations of institutional investors.

Keywords: Institutional Investors, Subjective Beliefs, Subjective Expected Returns, Subjective Risk, Subjective Risk Premia

JEL Classification: G11, G12, G23

Suggested Citation

Couts, Spencer J. and S. Gonçalves, Andrei and Loudis, Johnathan, The Subjective Risk and Return Expectations of Institutional Investors (January 5, 2024). Fisher College of Business Working Paper No. 2023-03-014, Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2023, Charles A. Dice Center Working Paper No. 2023-14, Available at SSRN: https://ssrn.com/abstract=4458499 or http://dx.doi.org/10.2139/ssrn.4458499

Spencer J. Couts

University of Southern California - Sol Price School of Public Policy ( email )

Los Angeles, CA 90089-0626
United States

USC Lusk Center of Real Estate ( email )

650 Childs Way
Los Angeles, CA 90089
United States

Andrei S. Gonçalves (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Johnathan Loudis

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

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