A model for measuring the relationship between risk and corporate rates of return. The characteristics of earnings distributions are used in evaluating risk exposure and its influence on profits. Application of the model to a sample of firms indicates that mean rates of return are importantly affected by risk exposure. Firms with large standard deviations have higher profit rates, while firms with positively skewed distributions have lower profit rates. For many industry groups, adjusting nominal profit rates for risk exposure considerably lowers the risk-adjusted rates. This is not true, however, of the drug and aerospace groups. Their risk premiums are very low, and they also have the highest risk-adjusted rates of return. The explanation for such profit patterns, therefore, must be sought in factors other than risk.
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