Further Evidence on the Risk-Return Relationship

Recent tests of the capital asset pricing model by Fama and French (1992) showed that there is no significant relationship between the average return and systematic risk of common stocks. We propose two econometric methods to improve the efficiency of the estimation and provide more powerful test statistics: joint pooled cross-section and time-series estimation and generalized least squares. Using these techniques, we find a highly significant relationship between average portfolio returns and systematic risk.