The following table shows regressions of the standard deviation and Sharpe Ratio of household portfolio annual returns for different tracks of the distribution of net wealth in Sweden between '99 and 2007. 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 instance, when comparing two portfolios, the one with the higher Sharpe ratio provide better return for the same level of risk (volatility). The Sharpe ratio is thus a measure of the risk-adjusted return.

What do the results indicate about portfolio diversification of households in Sweden. Explain your answer. (This question carries 14 marks).

Table:

Percentiles S.D Shape 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 0.2 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

(Student note: I notice that standard deviation increases exponentially as you move to higher percentile groups. The Shape ratio also does the same except when you reach the 100th percentile where the Shape Ratio drops. Sharpe ratio is not included in our syllabus and the only explanation we are given is in the question. I don't really understand what either the S.D or the ration are saying, so ANY explanation you can give would be appreciated.