N°25-90: Demand-Based Expected Returns

We develop a framework to extract heterogeneous investors' subjective beliefs by combining option prices and portfolio holdings. We show how to recover investor-specific expected returns and risks, consensus beliefs, and belief dispersion. Using S&P 500 options' buy-sell order data, we find that subjective expected returns and Sharpe ratios vary by investor type and depend on portfolio composition. Beliefs inferred from prices alone display strong counter-cyclicality, whereas those incorporating holdings can reverse sign, exhibit muted cyclicality, and align with professional survey expectations under markettiming strategies. Our results highlight the value of holdings data in belief recovery.