Risk or Mispricing? From the Mouths of Professionals
Robert J. Bloomfield
Cornell University - Samuel Curtis Johnson Graduate School of Management
Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC)
Financial Management, Vol. 33, No. 3, 2004
This article uses two experiments to assess whether security characteristics are associated with returns because investors believe they affect risk, or because investors believe they reflect mispricing. We examine how beta, market-to-book ratios, and firm size affect the returns Wall Street professionals expect, and how those factors affect perceived risk and mispricing. Consistent with traditional asset pricing models, professionals expect firms with higher betas to be riskier investments and to generate higher returns. Consistent with behavioral models, professionals expect firms with higher market-to-book ratios to be overpriced (and riskier). Professionals expect large firms to be less risky, but most do not view firm size to be a sign of mispricing.
Number of Pages in PDF File: 22Accepted Paper Series
Date posted: August 20, 2004
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