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Publications
  • Spring 2016
  • Article
  • Journal of Portfolio Management

Risk Neglect in Equity Markets

By: Malcolm Baker
  • Format:Print
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Abstract

The link between measures of risk and return within the equity market has been very weak over the past 47 years: in the United States, returns on high-risk stocks have cumulatively fallen short of the returns on low-risk stocks, during a period when the equity market as a whole experienced high returns relative to Treasury bills. In the spirit of Fischer Black’s 1993 article “Beta and Return,” published in this journal, the author takes seriously the idea that this evidence reflects a risk anomaly—a mispricing of risk for behavioral and institutional reasons—and revisits the associated implications for investing and corporate finance, examining asset allocation, high leverage in financial firms, low leverage in industrial firms, private equity, venture capital, and bank capital regulation along the way. Many of these implications fit nicely with Black’s original conjectures, and the author highlights refinements and additions to the original list.

Keywords

Asset Allocation; Equity Investment; Behavioral Finance; Private Equity

Citation

Baker, Malcolm. "Risk Neglect in Equity Markets." Journal of Portfolio Management 42, no. 3 (Spring 2016): 12–25.
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About The Author

Malcolm P. Baker

Finance
→More Publications

More from the Author

    • August 2020
    • Journal of Financial and Quantitative Analysis

    Leverage and the Beta Anomaly

    By: Malcolm Baker, Mathias F. Hoeyer and Jeffrey Wurgler
    • 2020
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    Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds

    By: Malcolm Baker, Daniel Bergstresser, George Serafeim and Jeffrey Wurgler
    • 2018
    • Faculty Research

    Detecting Anomalies: The Relevance and Power of Standard Asset Pricing Tests

    By: Malcolm Baker, Patrick Luo and Ryan Taliaferro
More from the Author
  • Leverage and the Beta Anomaly By: Malcolm Baker, Mathias F. Hoeyer and Jeffrey Wurgler
  • Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds By: Malcolm Baker, Daniel Bergstresser, George Serafeim and Jeffrey Wurgler
  • Detecting Anomalies: The Relevance and Power of Standard Asset Pricing Tests By: Malcolm Baker, Patrick Luo and Ryan Taliaferro
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