Two well-known researchers are upending the fundamental standard of using a risk-and-return framework to explain relative performance of different asset classes and different securities.
Roger G. Ibbotson and Thomas M. Idzorek contend the central framework should be a concept they call popularity.
“Most everything is looked at in a risk framework,” said Mr. Ibbotson, professor in the practice emeritus of finance at Yale University School of Management, New Haven, Conn., and chairman and chief investment officer of Zebra Capital Management LLC, Milford, Conn.
Mr. Idzorek is president of Morningstar Investment Management, a unit of Morningstar Inc., Chicago.
While risk is an important factor in determining asset prices, it is only one dimension of popularity, Messrs. Ibbotson and Idzorek say.
“The beauty of what we are putting forth with the theory of popularity is that it is consistent with that risk-and-return traditional framework,” Mr. Idzorek said. “But all of the anomalies, or premiums” observed in the market “might not be consistent with that risk-and-return framework. Typically (investors) have looked to behavioral finance to help explain” anomalies or premiums not associated with additional risk. “Dimensions of popularity ... help to explain again not only the premiums associated with additional risk but those premiums that have not come with additional risk.”
Popularity explains most of the best-known market premiums and anomalies, they said.
The popularity concept embraces many factors institutional investors use to explain differences in asset prices, they said. Aside from risk, dimensions of popularity include size of market capitalization, value and liquidity.