The Relationship between Volatility and Expected Returns: Some Evidence for Australia

We explore the intertemporal relation between the conditional mean and the conditional variance of industry portfolio returns and the Fama-French 25 size/book-to-market portfolio returns using data from Australia. We estimate the portfolio conditional covariance with the market and test whether it can predict the time-variation in the portfolio expected returns. We find strong and consistent evidence of a positive risk aversion relation, implying that the market returns do carry a positive risk premium in the Australian market. Our results suggest that the value factor is relevant for determining the variation of asset returns on both the industry portfolios and the size/book-to-market portfolios.