A Review Study of Risk-Return Relationship and Performance Measures Comparing Different Industry Sectors

Abstract

The significance of risk-return relationship is advocated from both investors and organizations. Evaluating the relationship between expected rate of return and the risk of asset would help investors to make better and more accurate decision on investing in different industries. To this regards, the study reviewed the risk-return relationship and pricing methods, theories and empirical studies to develop a performance measures comparing different industry sectors. The empirical evidences were discussed within the scope of market risks and returns. Then, the theories and pioneer literature related to Capital Asset Pricing Model (CAPM) was explored to show the relationship between expected return and systematic risk. Treynor Index, Sharpe Index, and Jansen Index as performance measures were extracted from CAPM model and the correlation were discussed between them. As of outcome, the study proposed a risk-return construct regards to develop better performance measures for industry sectors.