The Risk-Return Trade Off: Expected and Required Return

31 Pages Posted: 17 Jul 2006

See all articles by Enrico Rubaltelli

Enrico Rubaltelli

University of Padua

Riccardo Ferretti

Università di Modena e Reggio Emilia - Dipartimento di Comunicazione e Economia

Sandro Rubichi

Università degli studi di Modena e Reggio Emilia (UNIMORE)

Date Written: July 2, 2006

Abstract

Traditional economic models state that riskier investments should have a higher expected return. Psychological models of choice showed that people is influenced by the kind of information they are provided with and by the context of the choice, since they do not have a stable order of preferences but, rather, they construct it while giving a judgment. Experiment 1 showed that people consider the expected return of an equity only when it is explicitly stated, rather than computing it on the basis of the expected outcomes and probabilities. Experiment 2 and 3 showed that people judgments about the expected return of a stock are influenced by the way they are required to provide their estimates. In Experiment 2 participants' judgments were inconsistent with the risk-return trade off, whereas in Experiment 3 people asked a higher return from a riskier stock than from a safer one. Implications of the results for investors' behavior are discussed.

Keywords: Expected return, stock, risk

Suggested Citation

Rubaltelli, Enrico and Ferretti, Riccardo and Rubichi, Sandro, The Risk-Return Trade Off: Expected and Required Return (July 2, 2006). Available at SSRN: https://ssrn.com/abstract=913807 or http://dx.doi.org/10.2139/ssrn.913807

Enrico Rubaltelli (Contact Author)

University of Padua ( email )

Via Venezia, 8
Padova, 35131
Italy

Riccardo Ferretti

Università di Modena e Reggio Emilia - Dipartimento di Comunicazione e Economia ( email )

Viale Allegri, 9
Reggio Emilia, Modena 42121
Italy

Sandro Rubichi

Università degli studi di Modena e Reggio Emilia (UNIMORE) ( email )

Viale A. Allegri 9
Modena, Modena 42121
Italy

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