Why Do Wealthy Investors have a Higher Return on their Stocks?

Abstract

An analysis of the Survey of Consumer Finance shows that wealthy investors have a higher return on their stocks than their poorer counterparts. Three key empirical facts emerge: (i) wealthy investors employ more productive search efforts, (ii) financial risk bearing and search efforts are complementary, and (iii) wealthy investors have a higher risk adjusted return. These facts present a challenge to the “standard” asset pricing theory, which assumes that the return on stocks is uncorrelated with wealth and omits any relationship between search activity and portfolio returns. This study presents a search theoretic model of portfolio choice to understand the relationship between wealth, return, and search behavior.