The Risk-Return Tradeoff Among Equity Factors

53 Pages Posted: 26 Jan 2018 Last revised: 19 Apr 2019

See all articles by Pedro Barroso

Pedro Barroso

UNSW Australia Business School, School of Banking and Finance

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Date Written: April 17, 2019

Abstract

We examine the risk-return trade-off among several long-short equity factors. We obtain a positive trade-off for the operating profitability (RMW) and investment (CMA) factors, and a negative relationship for the market (RM) and momentum factors. The estimated trade-off subsists by accounting for the covariance with RM, and tends to be stronger in recessions. The out-of-sample forecasting power (of factor variances for own returns) is economically significant for both RMW and CMA. This suggests that the risk-return trade-off is stronger within segments of the stock market than for the whole. The factor risk-return trade-off is weaker among most international stock markets.

Keywords: Asset pricing, risk-return tradeoff, risk factors, market anomalies, realized volatility, predictability of stock returns, profitability, asset growth

JEL Classification: G11, G12, G17

Suggested Citation

Barroso, Pedro and Maio, Paulo F., The Risk-Return Tradeoff Among Equity Factors (April 17, 2019). Asian Finance Association (AsianFA) 2018 Conference. Available at SSRN: https://ssrn.com/abstract=3109456 or http://dx.doi.org/10.2139/ssrn.3109456

Pedro Barroso (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Paulo F. Maio

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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