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The Information Content of Investors' Expectations for Risk and Return

Author

Listed:
  • Thomas Berry

    (Driehaus College of Business, DePaul University, USA)

  • Keith Jacks Gamble

    (Driehaus College of Business, DePaul University, USA)

Abstract

This study reveals the information content of individual investors' risk-adjusted return expectations. Although individual investors overestimate the performance of their stock purchases on an average, the cross-sectional variation in their risk-adjusted return expectations is predictive of future risk-adjusted stock performance. Stock purchases that investors expect to outperform the most do outperform the stock purchases that investors expect to outperform the least by an annualized alpha of 16%. The best performing stocks are those that investors with excellent experience expect to outperform the most while the worst performing stocks are those that investors with limited experience expect to outperform the least. The most experienced investors appear to be successfully using information gathered from personal experience with the company's products or services, contact with someone who works for or with the company on a regular basis, and proximity to the company's operations.

Suggested Citation

  • Thomas Berry & Keith Jacks Gamble, 2013. "The Information Content of Investors' Expectations for Risk and Return," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 3(03n04), pages 1-23.
    • Handle: RePEc:wsi:qjfxxx:v:03:y:2013:i:03n04:n:s2010139213500171
    DOI: 10.1142/S2010139213500171
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    References listed on IDEAS

    as
    1. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2013. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, volume 2, number 2-b.
    2. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2013. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, volume 2, number 2-a.
    3. Gene Amromin & Steven A. Sharpe, 2014. "From the Horse's Mouth: Economic Conditions and Investor Expectations of Risk and Return," Management Science, INFORMS, vol. 60(4), pages 845-866, April.
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