Effects of Financial Variables and Market Risk on Investment Returns

Abstract

Previous studies have shown a positive correlation between the cross-section of average
stock returns and financial variables. Some studies have documented that market risk does not seem to help explain the cross-section of average stock returns. Using data from Compustat, this study examines the relationship between stock returns and stock prices with financial variables considered relevant in predicting stock returns and market risk. The empirical results show thatbook value per share, free-cash flow, return on equity, dividends, and cash flow per share have a weak or no effect on stock returns and stock prices. Earnings from operations and its stability over time are the two more relevant factors affecting stock returns and prices.