The risk-return tradeoff among equity factors

Pedro Barroso, Paulo Maio

Research output: Working paperPreprint

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Abstract

We examine the time-series risk-return trade-off among equity factors. We obtain a positive tradeoff for profitability and investment factors. Such relationship subsists conditional on the covariance with the market factor, which represents consistency with Merton’s ICAPM. Critically, we obtain an insignificant risk-return relationship for the market factor. The factor risk-return trade-off tends to be weaker among international equity markets. The out-of-sample forecasting power (of factor variances for future own returns) tends to be economically significant for the investment and profitability factors. Our results suggest that the risk-return trade-off is stronger within segments of the stock market than for the whole.
Original languageEnglish
DOIs
Publication statusPublished - 2018

Publication series

NameSSRN Electronic Journal
ISSN (Print)1556-5068

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