The Risk-Return Trade-Off Among Equity Factors

We examine the risk-return trade-off among alternative equity factors. We obtain a positivein-sample trade-off for the pro fitability (RMW) and investment (CMA/IA) factors of Famaand French (2015) and Hou, Xue, and Zhang (2015), while for the market and momentumfactors there is a negative relationship. The risk-return trade-off estimated for RMW andCMA/IA is unstable over time and tends to be stronger in recessions. The out-of-sampleforecasting power (of factor volatility for own returns) is economically signifi cant for bothRMW and CMA/IA as indicated by annualized utility gains above 5%. The factor risk-returntrade-off is weaker among international markets