Further Evidence on the Risk-Return Relationship

Further Evidence on the Risk-Return Relationship

By Haim Mendelson, Yakov Amihud, Bent Christensen
1993Working Paper No. 1248

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 genralized least squares. Using these techniques, we find a highly significant relationship between average portfolio returns and systematic risk.