Purchase Print Copy

 FormatList Price Price
Add to Cart Paperback78 pages $25.00 $20.00 20% Web Discount

The relationship between risk and profit is explored and a method for measuring the risk component of corporate earnings is developed. Average risk premiums and risk-adjusted rates of return are estimated for aerospace and ten other industry groups. Risk is defined as the probability that earnings in some future period will differ from an anticipated value. Assuming that, on average, profit expectations are fulfilled, risk can be measured by characteristics of the earnings distribution. Standard deviation and skewness are the statistical variables used to measure the firm's risk exposure. A statistically significant relationship is found between average rates of return on net worth and both standard deviation and skewness. Average risk adjusted rates of return are estimated for each industry group and compared with nominal rates of return. The risk-adjusted rates of return for drugs and aerospace are noticeably larger than those for the other industry groups. This finding implies that, for this sample, above-average rates of return in the aerospace group cannot be explained by above-average risk exposure. 78 pp. Ref.

This report is part of the RAND Corporation research memorandum series. The Research Memorandum was a product of the RAND Corporation from 1948 to 1973 that represented working papers meant to report current results of RAND research to appropriate audiences.

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.