Risk, Return, and Equilibrium: An Extension

Carolyn Carroll and K C John Wei

The Journal of Business, 1988, vol. 61, issue 4, 485-99

Abstract: This study extends a recent empirical reexamination of the risk-ret urn relationship by examining the possibility that an omitted size re lationship may account for the anomalous results. H. Levy's generaliz ed capital asset pricing model provides the theoretical basis for incorporating the impact of firm size on expected return by examining the relative importance of unsystematic risk in pricing closely-held securities compared to pricing widely-held securities. In so doing, the empirical analysis also provides a test of an implication of the generalized capital asset pricing model. Two methodologies are used t o test the hypotheses empirically. The results indicate that, even thou gh size has a significant impact on the risk-return relationship, it apparently does not account for the anomalous results. This implicati on is consistent under both methodologies. Copyright 1988 by the University of Chicago.

Date: 1988
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