Systematic risk, total risk and size as determinants of stock market returns

Abstract

This paper studies the historical relationship for the period 1962–1981 between stock market returns and the following variables: beta, residual standard deviation (or total variance), and size. We conclude that neither the traditional measure of risk (beta) nor the alternative risk measures (variance or residual standard deviation) can explain the cross-sectional variation in returns; only size seems to matter. When January returns are eliminated, even the size variable loses its statistical significance.