Systematic and Idiosyncratic Risk in the Cross-Section of Price Target Expected Returns
49 Pages Posted: 14 Nov 2012 Last revised: 4 Jun 2013
Date Written: April 16, 2013
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: Suggested Citation