The Subjective Risk and Return Expectations of Institutional Investors

84 Pages Posted: 25 May 2023 Last revised: 11 Jan 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 provide three stylized facts about their subjective risk and return expectations on 19 asset classes. First, there is a strong and positive subjective risk-return tradeoff, with most of the variability in subjective expected returns due to variability in subjective risk premia (compensation for market beta) as opposed to subjective alphas. Second, belief variation and the positive risk-return tradeoff are both stronger across asset classes than across institutions. And third, the subjective expected returns of these institutions predict subsequent realized returns across asset classes and over time. Taken together, our findings imply that models with subjective beliefs should reflect a risk-return tradeoff. Additionally, accounting for this subjective risk-return tradeoff when modeling multiple asset classes is even more important than incorporating average belief distortions or belief heterogeneity in our setting.

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, Charles A. Dice Center Working Paper No. 2023-14, Proceedings of the EUROFIDAI-ESSEC Paris December Finance Meeting 2023, 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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