Distinguishing Rationality and Bias in Prices: Implications from Judgments of Risk and Expected Return

Hersh Shefrin

Chapter 1 in Contemporary Challenges in Risk Management, 2014, pp 7-49 from Palgrave Macmillan

Abstract: Abstract There is a gulf between what theory and practice tell us about how risk premiums reward investors for bearing risk. An elegant theory relates expected return to both mean-variance efficient portfolios and to the covariance between returns and a pricing kernel. However, this theory has not proved to be especially valuable in empirical work, where risk premiums are instead explained using simple factor models involving size and book-to-market equity (B/M), for which there is little theoretical justification.

Keywords: Stock Return; Asset Price; Expected Return; Hedge Fund; Safe Stock (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-44762-3_2

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DOI: 10.1057/9781137447623_2

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