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New Research Questions Role of Risk in Investment Decision Making Process.

* David Eccles School of Business Study Analyzing Balance of Value and Risk in Portfolio Investments

* Accepted Assessment Models Fall Short; Historical Performance Stressed

SALT LAKE CITY -- When it comes to the world of investments, many assume to win big one must risk big. Research from a University of Utah David Eccles School of Business professor shows risk may not be the best indicator of an investment's potential for big returns.

In his paper, "The Critical Role of Conditioning Information in Determining if Value is Really Riskier than Growth," Michael Cooper and co-author Stefano Gubellini demonstrate a lack of reliability -- of CCAPMs (Conditional Capital Asset Pricing Models) in properly gauging risk and predicting the potential payoff from a financial investment.

Cooper says of CCAPMs, the models used to determine the theoretical appropriate required rate of return based off of non-diversifiable risk, "They leave a lot to be desired." He continues, "Our research shows that 90 percent of the time no correlation exists between the perceived risk and actual payoff of an investment."

CCAPMs are an accepted tool used in studying critical portfolio decisions, and yet can sometimes be too rigid in assessing acceptable risk tolerance in stocks and other investments, according to Cooper's and Gubellini's research. When such models fall short in predicting results, they can imperil long-term portfolio management and performance.

The study shows risk accounts for only 10 percent of an investment's gain in either value or growth strategies. This finding leads Cooper to conclude that other factors outweigh risk in determining an investment's potential level of returns.

Instead, Cooper says that "examining the historical performance, and gaining an understanding of how returns vary over time," may be a better, simpler and more accurate way to evaluate the appropriate rate of return for an investment.

"The Critical Role of Conditioning Information in Determining if Value is Really Riskier than Growth," was published in the Journal of Empirical Finance. Michael Cooper is a professor of Finance at the University of Utah's David Eccles School of Business. Stefano Gubellini is a professor of Finance at San Diego State University,

About the David Eccles School of Business

Founded in 1917 in Salt Lake City, the David Eccles School of Business has programs in entrepreneurship, technology innovation and venture capital management. Emphasizing interdisciplinary education and experiential learning, it launched the country's largest student-run venture capital fund with $18.3 million, and is home to the Pierre Lassonde Entrepreneur Center and the Sorenson Center for Discovery and Innovation. Approximately 3,500 students are enrolled in its undergraduate, graduate and executive degree programs, as well as joint MBA programs in architecture, law and health administration. For more information, visit
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Publication:Business Wire
Geographic Code:1U8UT
Date:May 17, 2011
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