Systematic and Idiosyncratic Risk in the Cross-Section of Price Target Expected Returns

Using a measure of ex-ante expected returns based on analyst price targets, we find strong evidence that investors price both systematic (beta and co-skewness) and non-systematic (idiosyncratic volatility) risk when determining the appropriate rate of return on a security. We demonstrate that price targets contain risk-related information not incorporated into other ex-ante measures of expected returns, as the risk/reward relations are not present using the other measures. Use of the price-target based measure therefore drastically improves our ability to detect risk/reward relations in financial markets