Assessment of Effect of Risk Factors on Common Stock Risk Premium

Abstract

One important factor that affects investment decisions is return of investment. On the other hand, risk factors measurement in the stock market is highly important to determine cost of capital and to assess investment. Therefore, exploring a perfect collection of the aspects that covers all financial positions of an entity provides investors main requirements and results in prosperity of the capital market. The research data was analyzed by multiple liner regression. Results showed that there is a significant relationship between risk premium and some risk factors (standard deviation of earning, positive earning, interest rate variability, debt value to market value, distress, B/P ratio) at the companies level. Also, research results at different industries level showed that in each industry risk premium was affected by some of these factors. Relationship between the explored indicators in this research and risk premium (except the expected earnings growth) was verified.

Keywords

• : cost of capital
• risk
• investment returns