Assessing Risk in Household Portfolios: Progress and Open Issues at the Macro and Micro/Survey Level
Daniele Fano, Head of PGAM Economic Research
Definitions of risk for financial portfolios can differ according to the time-frame.
The standard Markowitz/Tobin/Sharpe short-term framework has the advantage of being easily translatable into statistically significant items. Its limitations, when moving to longer-term horizons, should however be kept in mind.
From a macro standpoint, a more detailed breakdown of National Account Statistics, such as that recently recommended by OECD, can allow the analysis of aggregate household assets according to risk. Such analysis can help define the “playing field” investors face.
Given the skewness in the distribution of wealth and heterogeneous behaviour, surveys are essential in providing indications on differential individual exposure towards risk. In industrialized nations access to risky securities and to diversified portfolios is limited. Surveys also show that there is no apparent relationship between portfolio risk and socio-demographic variables. Finally, surveys can help understand how individuals take decisions about risk, why and to what extent they are aware of the nature and implications of risk and are able to optimize.
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