Skip to Content
Rekenthaler Report

Do More Popular Stocks Have Lower Returns?

Evaluating how a new stock market model works in practice.

Mentioned: ,

Beyond Risk
Tuesday's column outlined a fresh hypothesis for how stock markets are priced. Popularity: A Bridge Between Classical and Behavioral Finance by Roger Ibbotson and Morningstar's Thomas Idzorek, Paul Kaplan, and James Xiong upends the usual perspective. In the authors' framework, as in classical finance, securities receive higher expected returns for shouldering more risk, all else being equal. However, risk is only one dimension of popularity (or unpopularity since risk is unpopular). In general, securities with desirable characteristics receive lower expected returns, and those with undesirable characteristics receive higher expected returns. The Popularity scheme counts down, not up.

(It may seem strange to treat popular stocks as being less profitable than others. Wouldn't their reputation boost their prices? To answer the rhetorical question, yes it would. However, stock market models assume that the effect has already occurred, which leaves the owners of costly dividend-paying stocks--the story is different for firms that retain all their earnings--in the same boat as the owners of costly bonds: facing lower expected returns because of their lower ongoing yields.)

John Rekenthaler has a position in the following securities mentioned above: MORN. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.