Real Investment, Risk and Risk Dynamics
46 Pages Posted: 25 Mar 2008 Last revised: 12 Jun 2009
Date Written: June 11, 2008
Abstract
The spread in average returns between low and high asset growth and investment portfolios is largely accounted for by their spread in systematic risk, as measured by the Chen, Roll and Ross (1986) factors. In addition, systematic risk and volatility fall sharply during large investment periods. Consistent with the predictions of both the q-theory and real options models, the systematic risk spread and fall in risk and volatility are largest for high q firms. Moreover, investment and asset growth factors can predict economic growth. Our evidence implies that much of negative investment (asset growth)-future returns relationship can be explained by rational pricing.
Keywords: Real Investment, Systematic Risk, Real Options, Mispricing, Tobin's q
JEL Classification: G0, G12, G31
Suggested Citation: Suggested Citation
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