DP11734 Rich Pickings? Risk, Return, and Skill in the Portfolios of the Wealthy

Author(s): Laurent Bach, Laurent Calvet, Paolo Sodini
Publication Date: December 2016
Keyword(s): cost of debt, factor-based investing, household finance, inequality, leverage, private equity, real estate, risk-taking
JEL(s): D12, D31, G11
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11734

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.