December 02, 2016
Rich Pickings? Risk, Return, and Skill in the Portfolios of the Wealthy
Laurent CALVET, HEC Paris
(with Laurent Bach and Paolo Sodini)
This paper investigates the risk and return characteristics of household wealth. Using a high-quality administrative panel of Swedish residents, we show that the mean return on gross wealth strongly increases with net worth, primarily because wealthy households bear high levels of systematic risk. By contrast, the middle class earn high mean returns from levered positions in real estate, so that the mean return on net wealth is a U-shaped function of net worth. We also document that wealthy households bear high levels of idiosyncratic risk, but do not seem to earn abnormal risk-adjusted returns. Finally, we show in microsimulations that portfolio returns largely explain the dynamics of inequality at the top.