Risk or Mispricing? From the Mouths of Professionals
Robert J. Bloomfield
Cornell University - Samuel Curtis Johnson Graduate School of Management
Johnson@Cornell Tech, Cornell University; Interdisciplinary Center (IDC)
July 8, 2002
Most tests of asset pricing models rely on realized returns as a proxy for expected returns, and cannot determine whether security characteristics are associated with returns because they affect risk or because they reflect mispricing. This paper avoids these problems by conducting two experiments in which we directly elicit how Beta, Market-to-Book ratios and firm size affect the returns expected by Wall Street professionals, and how those factors affect perceived risk and mispricing. Consistent with traditional asset pricing models, professionals expect firms with higher Betas to be riskier investments and generate higher returns. Consistent with behavioral models, professionals expect firms with higher Market-to-Book ratios to be over-priced (and riskier). Professionals expect large firms to be less risky, but do not view firm size to be a sign of mispricing.
Number of Pages in PDF File: 37
Date posted: August 23, 2002