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Risk and the Rate of Return on Financial Assets: Some Old Wine in New Bottles

Abstract

Strides have been made recently in the discovery and refinement of theoretical models which purport to describe the relationship between asset prices and their risk attributes. (See especially Lintner [13,14,15], Sharpe [19], Mosin [17,18] and Fama [7,8.9].) The models have gained widespread acceptance because of their intuitive appeal and because most reported empirical evidence [1,4,5,11,20,21] allegedly supports their predictive value. It is our purpose to analyze critically one aspect of the nature of this evidence, reveal its inherent weakness, and to design an alternative test to examine the risk-return function. After observing the performance of an extremely large number of issues over long periods of time, we find little support for the notion that risk premiums have, in fact, manifested themselves in realized rates of return.

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[1] F. D. Arditti Risk and the Required Return on Equity.The Journal of Finance, vol. 22 (March 1967), pp. 1936.

[2] F. Black Capital Market Equilibrium with Restricted Borrowing.Journal of Business, vol. 45 (July 1972), pp. 444454.

[4] G. Briscoe ; J. M. Samuels ; and D. J. Smyth . “The Treatment of Risk in the Stock Market.The Journal of Finance, vol. 24 (September 1969), pp. 707713.

[6] John L. Evans , and Stephen H. Archer . “Diversification and the Reduction of Dispersion: An Empirical Analysis.The Journal of Finance, vol. 23 (December 1968), pp. 761767.

[7] Eugene F. Fama Risk, Return and Equilibrium: Some Clarifying Comments.The Journal of Finance, vol. 23 (March 1960), pp. 2940.

[9] Eugene F. Fama Risk, Return and Equilibrium.Journal of Political Economy, vol. 79, no. 1 (January/February 1971), pp. 3055.

[14] John. Lintner The Valuation of Risk Assets and the Selection of Risky Investments on Stock Portfolios and Capital Budgets-The Review of Economics and Statistics, vol. 47 (February 1965), pp. 1337.

[15] John. Lintner The Aggregation of Investors' Diverse Judgment and Preferences in Purely Competitive Securities Markets.Journal of Financial and Quantitative Analysis, vol. 4, no. 4 (December 1969), pp. 347400.

[17] J. Mossin Equilibrium in a Capital Asset Market.Econometrica (October 1966), pp. 768783.

[21] Robert M. Soldofsky , and Roger L. Miller . “Risk Premium Curves for Different Classes of Long-Term Securities, 1950–1966.The Journal of Finance, vol. 24 (June 1969), pp. 429445.

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Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
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