The Return Expectations of Institutional Investors

53 Pages Posted: 6 Nov 2019 Last revised: 1 Jun 2020

See all articles by Aleksandar Andonov

Aleksandar Andonov

University of Amsterdam

Joshua D. Rauh

Stanford Graduate School of Business; Hoover Institution; National Bureau of Economic Research (NBER)

Date Written: May 2020


Analysis of required expected return disclosures by public pension funds in individual asset classes reveals a reliance on past performance in setting return expectations. These extrapolative expectations operate through the expected risk premium and occur across all risky asset classes. Pension plans act on their extrapolated expectations by adjusting their target asset allocations. Pension funds extrapolate performance more when executives have personally experienced a longer performance history with the fund, and when employing certain investment consultants. The results cannot be explained by differential risk-taking, persistent investment skill, efforts to reduce costly rebalancing, or fiscal pressure from unfunded liabilities.

Keywords: Institutional investors, return expectations, asset allocation, portfolio choice, return extrapolation

JEL Classification: G02, G11, G23, G28, H75, D83, D84

Suggested Citation

Andonov, Aleksandar and Rauh, Joshua D., The Return Expectations of Institutional Investors (May 2020). Stanford University Graduate School of Business Research Paper No. 18-5, 9th Miami Behavioral Finance Conference 2018, Available at SSRN: or

Aleksandar Andonov

University of Amsterdam ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV


Joshua D. Rauh (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Hoover Institution ( email )

Stanford, CA 94305-6010
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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