Statistical and economic significance of stock return predictability: A mean-variance analysis

Xiangdong Wei, Chu Zhang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

9 Citations (Scopus)


We use mean-variance analysis to investigate the statistical and economic significance of stock return predictability as documented in Fama and French (1992). We ask if investors who form portfolios conditioned on the predictive variables can earn higher expected utility than those who optimize unconditionally. The result shows that, by and large, they cannot. We explore the reasons for the lack of economic gains and find that, while the in-sample relation between returns and predetermined firm-specific variables is strong, it is not stable enough to produce better out-of-sample predictions. We conclude that the return predictability is not inconsistent with rational asset pricing.
Original languageEnglish
Pages (from-to)443-463
Number of pages21
JournalJournal of Multinational Financial Management
Issue number4-5
Publication statusPublished - 1 Dec 2003
Externally publishedYes


  • Certainty equivalent of expected utility
  • Firm-specific variables
  • Mean-variance analysis
  • Out-of-sample prediction
  • Return predictability

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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