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Idiosyncratic Risk and Australian Equity Returns : Discussion Paper No 96

Dempsey, Mike, Drew, Michael E., & Veeraraghavan, Madhu (2001) Idiosyncratic Risk and Australian Equity Returns : Discussion Paper No 96. [Working Paper] (Unpublished)

Abstract

Australian stocks. We report that the portfolio with highest idiosyncratic volatility generates an average annual return of over 45%. We observe additionally that the outcome is consistent with an exponential growth process for stock prices. Further, consistent with Malkiel and Xu, we observe that a stock’s idiosyncratic volatility is inversely correlated with the size of the underlying firm. Thus, our model advances an interpretation of the Fama and French finding that portfolios of stocks of small firms offer superior risk-adjusted returns. Moreover, our findings challenge the portfolio theory of Markowitz (1959) and the asset-pricing model of Sharpe (1964).

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625 since deposited on 11 Nov 2004
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ID Code: 563
Item Type: Working Paper
Additional URLs:
Keywords: Idiosyncratic risk, Capital Asset Pricing Model, Size effect
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Financial Economics (140207)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2001 (Please consult author)
Deposited On: 11 Nov 2004
Last Modified: 02 Feb 2012 19:44

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