The Risk-Return Tradeoff Among Equity Factors

Journal of Empirical Finance (forthcoming)

51 Pages Posted: 2 Feb 2017 Last revised: 12 Jun 2024

See all articles by Pedro Barroso

Pedro Barroso

CATÓLICA-LISBON School of Business & Economics

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Date Written: June 12, 2024

Abstract

We examine the time-series risk-return tradeoff among equity factors. We obtain a positive tradeoff for profitability and investment factors, which is consistent with the APT. Such relationship subsists when we control by the covariance with the market factor, which represents consistency with Merton's ICAPM. Critically, we obtain an insignificant risk-return relationship for the market and other factors. The tradeoff is weaker among international equity markets. The out-of-sample forecasting power tends to be economically significant for the investment and profitability factors. Our results suggest that the risk-return tradeoff is stronger within segments of the stock market than for the whole.

Keywords: Asset pricing, risk-return tradeoff, ICAPM, realized volatility, profitability and investment factors JEL classification: G11, G12, G17

JEL Classification: G11, G12, G17

Suggested Citation

Barroso, Pedro and Maio, Paulo F., The Risk-Return Tradeoff Among Equity Factors (June 12, 2024). Journal of Empirical Finance (forthcoming), Available at SSRN: https://ssrn.com/abstract=2909085 or http://dx.doi.org/10.2139/ssrn.2909085

Pedro Barroso

CATÓLICA-LISBON School of Business & Economics ( email )

Palma de Cima
Lisbon, Lisboa 1649-023
Portugal

HOME PAGE: http://https://clsbe.lisboa.ucp.pt/person/pedro-monteiro-e-silva-barroso

Paulo F. Maio (Contact Author)

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

HOME PAGE: http://sites.google.com/site/paulofmaio/home

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