Basic asset pricing theory predicts high expected returns are a compensation for risk. However, high expected returns might also constitute anomalies due to frictions or behavioral biases. We propose two complementary simple-to-use tests to assess whether risk can explain differences in expected...

Basic asset pricing theory predicts high expected returns are a compensation for risk. However, high expected returns might also represent an anomaly due to frictions or behavioral biases. We propose two complementary, simple-to-use tests to assess whether risk can explain differences in...