Risk and Return: A Revisit Using Expected Returns |
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| Authors: | Felicia Marston Robert S. Harris |
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| Affiliation: | University of Virginia, Charlottesville, VA 22903. We thank colleagues at the University of North Carolina and the University of Virginia for helpful comments. We thank Bell Atlantic and I/B/E/S Inc. for supplying data and Peter Crawford for collaboration on prior research. The first author gratefully acknowledges the financial support provided to the McIntire School by the Associates Program, and the second author thanks Darden Sponsors for support. |
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| Abstract: | This paper uses direct estimates of expected returns to examine the link between standard measures of financial risk and investor return requirements. The results show that systematic risk commands a significant positive risk premium, much larger than found using historical returns as proxies for expectations. Furthermore, there are nonlinearities in the relationship between risk and return. Finally, we show that expected returns and risk premiums in the equity markets change over time and that these changes are related to changes in interest rates on U.S. government obligations. |
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