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Rich Pickings? Risk, Return, and Skill in the Portfolios of the Wealthy

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  • Calvet, Laurent E.
  • Bach, Laurent

Abstract

This paper investigates the risk and return characteristics of household wealth. The analysis is based on a high-quality administrative panel that reports the financial assets, real estate, private equity, and debt of Swedish residents. We show that the mean return on gross wealth strongly increases with net worth, primarily because wealthy households bear high systematic risk. By contrast, the mean return on net wealth is U-shaped in net worth because the middle class hold levered positions in real estate. Moreover, wealthy households bear high idiosyncratic risk but do not seem to earn abnormally high returns. Finally, we show that returns on wealth largely explain the inequality dynamics at the top.

Suggested Citation

  • Calvet, Laurent E. & Bach, Laurent, 2016. "Rich Pickings? Risk, Return, and Skill in the Portfolios of the Wealthy," CEPR Discussion Papers 11734, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11734
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    Keywords

    Household finance; Inequality; Risk-taking; Factor-based investing; Leverage; Cost of debt; Real estate; Private equity;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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