Subjective Risk-Return Trade-off

We conduct a novel survey of 2,548 nationally 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 respondents’ perceptions of the risk and return among risky assets. This higher risk–lower return relationship remains significant even for wealthy, highly educated, and financially-literate respondents. We find that negative risk-return trade-offs translate into under-diversified portfolios as investors disproportionately allocate wealth to assets with a higher subjective Sharpe ratio