For the Weekend: Quantum Mechanics in Your Face!

Must-Read: Laurent Bach, Laurent Calvet, and Paolo Sodini: Risk, return, and skill in the portfolios of the [Swedish] wealthy: "Administrative data... the wealthy indeed earn higher returns on their asset portfolios... http://voxeu.org/article/risk-return-and-skill-portfolios-wealthy

...primarily due to high levels of compensated risk. Households at the top of the wealth distribution further exhibit highly heterogeneous investment performance due to high levels of idiosyncratic risk.... The share of risky assets increases monotonically with net worth, reaching 21% for the median household, 62% for the top 1%-0.5%, and 95% for the top 0.01%... allocating a high share of gross wealth to risky assets; and by picking risky assets that load aggressively on systematic risk factors. Wealthy households also bear highly idiosyncratic risk through substantial direct holdings of private and public equity.... The expected return on total gross wealth is 2.7% per year higher for the top 10%-5% of households, 4.1% per year higher for the top 1%-0.5%, and 6.2% per year higher for the top 0.01%....

In contrast to gross wealth, net wealth earns an expected return that is U-shaped across brackets of net worth (see Figure 1, Panel B). Middle-class households have highly leveraged positions in real estate that generate high mean returns on net wealth. Upper-middle-class households have lower leverage and lower average returns. At the very top, households have very little personal debt but achieve high expected returns by bearing high systematic risk....

We find no empirical evidence that the rich can better pick stocks and generate higher risk-adjusted returns than other households. Similarly, we do not measure abnormal risk-adjusted returns on real estate and private equity holdings. We verify the robustness of our results on a dataset containing the yearly returns of US foundations.... The realised returns of US foundations are fully explained by their exposures to the equity market, while exceptional investment skill cannot be detected...

Comments