The Investment Manifesto

36 Pages Posted: 15 Dec 2012

See all articles by Xiaoji Lin

Xiaoji Lin

University of Minnesota

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 5, 2012


A deep-ingrained doctrine in asset pricing says that if an empirical characteristic-return relation is consistent with investor “rationality,” the relation must be “explained” by a risk (factor) model. The investment approach questions the doctrine. Factors formed on characteristics are not necessarily risk factors; characteristics-based factor models are linear approximations of firm-level investment returns. The evidence that characteristics dominate covariances in horse races does not necessarily mean mispricing; measurement errors in covariances are likely to blame. Most important, risks do not “determine” expected returns; the investment approach is no more and no less “causal” than the consumption approach in “explaining” anomalies.

Keywords: The risk doctrine, investment-based asset pricing, measurement errors in covariances, characteristics, asset pricing anomalies

JEL Classification: D21, D92, E22, E44, G12, G14, G31, G32, G35

Suggested Citation

Lin, Xiaoji and Zhang, Lu, The Investment Manifesto (December 5, 2012). AFA 2013 San Diego Meetings Paper, Available at SSRN: or

Xiaoji Lin

University of Minnesota ( email )

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Minneapolis, MN 55455
United States

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

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Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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