The Risk-Return Tradeoff Among Equity Factors

70 Pages Posted: 2 Feb 2017 Last revised: 22 Aug 2022

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

Multiple version iconThere are 3 versions of this paper

Date Written: August 20, 2022

Abstract

We examine the time-series risk-return trade-off among equity factors. We obtain a positive trade-off for profitability and investment factors. Such relationship subsists conditional on the covariance with the market factor, which represents consistency with Merton's ICAPM. Critically, we obtain an insignificant risk-return relationship for the market factor. The factor risk-return trade-off tends to be weaker among international equity markets. The out-of-sample forecasting power (of factor variances for future own returns) tends to be economically significant for the investment and profitability factors. Our results suggest that the risk-return trade-off is stronger within segments of the stock market than for the whole.

Keywords: Asset pricing, risk-return trade-off, ICAPM, realized volatility, profitability and investment factors

JEL Classification: G11, G12, G17

Suggested Citation

Barroso, Pedro and Maio, Paulo F., The Risk-Return Tradeoff Among Equity Factors (August 20, 2022). 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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