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.
This report is part of the RAND Corporation Paper series. The paper was a product of the RAND Corporation from 1948 to 2003 that captured speeches, memorials, and derivative research, usually prepared on authors' own time and meant to be the scholarly or scientific contribution of individual authors to their professional fields. Papers were less formal than reports and did not require rigorous peer review.
This document and trademark(s) contained herein are protected by law. This representation of RAND intellectual property is provided for noncommercial use only. Unauthorized posting of this publication online is prohibited; linking directly to this product page is encouraged. Permission is required from RAND to reproduce, or reuse in another form, any of its research documents for commercial purposes. For information on reprint and reuse permissions, please visit www.rand.org/pubs/permissions.
The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.