Risk and the Aerospace Rate of Return.

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.