The Subjective Risk and Return Expectations of Institutional Investors

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.