Question

Table 2 shows regressions of the standard deviation and Sharpe ratio of household portfolio annual returns for different brackets of the distribution of net wealth in Sweden between 1999 and 2007 (standard errors are not reported). The reported Sharpe ratio of a household portfolio is equal to the expected return of the portfolio divided by its standard deviation. The Sharpe ratio is used to measure performance in relation to risk taken. For example, when comparing two portfolios, the one with the higher Sharpe ratio provides better return for the same level of risk. The Sharpe ratio is therefore a measure of the risk-adjusted return. What do the results indicate about portfolio diversification of households in Sweden? Explain your answer.

Table 2 Portfolio standard deviation and Sharpe ratio

Percentiles	Standard deviation	Sharpe ratio
50–55	0.137	0.401
55–60	0.143	0.403
60–65	0.149	0.405
65–70	0.156	0.408
70–75	0.164	0.411
75–80	0.171	0.415
80–85	0.179	0.420
85–90	0.188	0.425
90–95	0.200	0.432
95–97.5	0.212	0.441
97.5–99	0.221	0.448
99–99.9	0.236	0.449
100	0.262	0.432

Answer 1