Finance Seminar（2014-23）

Topic:Prospect Theory and the Risk-Return Trade-off

Speaker:Jianfeng Yu, University of Minnesota

Time:Wednesday, 23 July, 10:00-11:30

Location:Room 217,Guanghua Building 2

Abstract:A fundamental principle in finance is the positive relation between risk and expected return, whereas recent empirical evidence suggests the opposite. We apply prospect theory to shed light on this violation. Prospect theory posits that when facing prior losses, individuals tend to be risk seeking rather than risk averse. Consequently, among stocks where average investors face prior losses, there could be a negative risk-return relation. By contrast, among stocks where average investors face capital gains and are risk averse, the traditional positive relation should emerge. Using several intuitive risk measures, we provide consistent support for our hypotheses.