New Study Reveals Idiosyncratic Risk Drives Stock Returns Across Countries
Idiosyncratic volatility of stocks is linked to their returns, contradicting traditional theories. By analyzing stock data from 36 countries between 1973 and 2007, researchers found that higher idiosyncratic risk leads to higher expected returns. This means that individual stock risk is actually rewarded with higher profits, going against the idea that diversification eliminates this type of risk.