The Subjective Risk and Return Expectations of Institutional Investors

Fisher College of Business Working Paper No. 2023-03-014

Charles A. Dice Center Working Paper No. 2023-14

69 Pages Posted: 25 May 2023

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: May 24, 2023

Abstract

We use the long-term Capital Market Assumptions of major asset managers and institutional investor consultants from 1987 to 2022 to provide three stylized facts about their subjective risk and return expectations on 19 asset classes. First, the subjective distribution of asset class returns is well described by a 1-factor structure, with this single risk factor typically explaining more than 65% of the subjective variability in asset class returns. Second, at least 80% of the variability in subjective expected returns is due to variability in subjective risk premia (compensation for beta) as opposed to subjective mispricing (alpha). And third, subjective risk and return expectations vary much more across asset classes than across institutions. Our findings imply that models with subjective beliefs should reflect a risk-return tradeoff. Additionally, accounting for this risk-return trade-off is even more important than incorporating belief heterogeneity across institutional investors when modeling multiple asset classes.

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 (May 24, 2023). Fisher College of Business Working Paper No. 2023-03-014, 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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