Systematic and Idiosyncratic Risk in the Cross-Section of Price Target Expected Returns

49 Pages Posted: 14 Nov 2012 Last revised: 4 Jun 2013

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Scott Murray

Georgia State University

Date Written: April 16, 2013

Abstract

Using a measure of ex-ante expected returns based on analyst price targets, we find strong evidence that investors price both systematic (beta and co-skewness) and non-systematic (idiosyncratic volatility) risk when determining the appropriate rate of return on a security. We demonstrate that price targets contain risk-related information not incorporated into other ex-ante measures of expected returns, as the risk/reward relations are not present using the other measures. Use of the price-target based measure therefore drastically improves our ability to detect risk/reward relations in financial markets.

Keywords: Expected Stock Returns, Price Targets, Systematic Risk, Idiosyncratic Risk, Co-Skewness

JEL Classification: G10, G11, C13

Suggested Citation

Bali, Turan G. and Murray, Scott, Systematic and Idiosyncratic Risk in the Cross-Section of Price Target Expected Returns (April 16, 2013). Georgetown McDonough School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=2174471 or http://dx.doi.org/10.2139/ssrn.2174471

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Scott Murray (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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