The risk-return trade-off among equity factors

We examine the time-series risk-return trade-off among equity factors. We obtain a positive trade-off for profitability and investment factors, which is consistent with the APT. Such relationship subsists conditional on the covariance with the market factor, which represents consistency with Merton's ICAPM. Critically, we obtain an insignificant risk-return relationship for the market and other factors. The risk-return trade-off tends to be weaker among international equity markets. The out-of-sample forecasting power tends to be economically significant for the investment and profitability factors. Our results suggest that the risk-return trade-off is stronger within segments of the stock market than for the whole.