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Variable Rates of Return

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Looking for 4-5 paragraphs with references to explain, "why investors demand higher expected rates of return on stocks with more variable rates of return."

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The expert examines the variable rates of return. Why investors demand higher expected rates of return on stocks with more variable rates of return is determined.

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Investors might expect it, but there is no evidence that is occurs. It sounds to me like only novices really expect this out of stocks.

This is a fairly simple concept. The most important thing to remember is that the more risk one takes, the more of a premium must accrue to the risk taker. Stocks that are volatile are, of course, riskier and hence, have a premium attached to them. The same goes for bonds, long term bonds are riskier because it is harder to predict long term changes. Therefore, higher returns are built into them as a premium the market adds to long term bonds to compensate for both the risk and the fact that your money is tied up there for so long.

A recent article in Finance Analysis Journal (2011) showed that this approach to volatile stocks is not true. Riskier stocks do not provide returns above more stable stocks. The opposite is true (Baker et al, 2011: 52). There is no warrant, in other words, to charge premiums for high risk ...

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