Abstract
We examine the risk-return trade-off among several long-short equity factors. We obtain a positive trade-off for the operating profitability (RMW) and investment (CMA) factors, and a negative relationship for the market (RM) and momentum factors. The estimated trade-off subsists by accounting for the covariance with RM, and tends to be stronger in recessions. The out-of-sample forecasting power (of factor variances for own returns) is economically significant for both RMW and CMA. This suggests that the risk-return trade-off is stronger within segments of the stock market than for the whole. The factor risk-return trade-off is weaker among most international stock markets.
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