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The risk–return tradeoff among equity factors

Author

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  • Barroso, Pedro
  • Maio, Paulo

Abstract

We examine the time-series risk–return tradeoff among equity factors. We obtain a positive tradeoff for profitability and investment factors, which is consistent with the APT. Such relationship subsists when we control by the covariance with the market factor, which represents consistency with Merton’s ICAPM. Critically, we obtain an insignificant risk–return relationship for the market and other factors. The tradeoff is weaker among international equity markets. The out-of-sample forecasting power tends to be economically significant for the investment and profitability factors. Our results suggest that the risk–return tradeoff is stronger within segments of the stock market than for the whole.

Suggested Citation

  • Barroso, Pedro & Maio, Paulo, 2024. "The risk–return tradeoff among equity factors," Journal of Empirical Finance, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:empfin:v:78:y:2024:i:c:s0927539824000537
    DOI: 10.1016/j.jempfin.2024.101518
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    More about this item

    Keywords

    Asset pricing; Risk–return tradeoff; ICAPM; Realized volatility; Profitability and investment factors;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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