We study the distributional effects of asset returns using a heterogeneous-agent model estimated to match the joint distribution of wealth and returns. In the model, endogenous portfolio decisions play a key role through their impact on households’ wealth accumulation. We find substantial welfare effects of changes in asset returns. A permanent decline of one percentage point in expected returns increases the consumption share of the top 10% by 6% permanently. Our findings suggest that lower returns increase inequality, which contradicts Piketty’s (2014) r − g formula. To resolve this contradiction, we derive a generalized formula that includes the consumption/wealth ratio and which is consistent with our empirical and theoretical findings. Nonetheless, wealth inequality within the Pareto tail is fairly insensitive to asset returns. Instead, inequality between the Pareto tail and the lower range of the distribution responds strongly to asset returns through their differential effects on active savings relative to wealth. Simulations suggest that asset price dynamics can explain the main variations in U.S. top wealth shares since the 1960s.