Risk and Return Perceptions of Institutional Investors

Executive Summary. This study examines the responses of a survey mailed to portfolio managers for large pension funds and insurers regarding their perceptions of the inherent risk and return of twenty investment choices. The purpose of the study is to determine whether large portfolio managers perceive the inherent risk of a specific asset to be consistent with the expected return for that investment vehicle. Results from a means difference test on responses indicate that these investors generally do not feel that the inherent risk of many assets is justified by the return expected for a particular asset. For many asset classes respondents indicate that they perceive an asset to have a greater inherent risk level than the expected return for that asset class. This indicates that investors may be applying different risk and return levels for various assets in their portfolio allocation processes. Findings could partially explain why actual portfolio allocations often do not follow theoretically suggested guidelines.