Subjective Risk-Return Trade-off

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

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