Journal of Business & Financial Affairs

The Adaptive Nature of Investors Risky-Preferences

Abstract

Marco Antonio Souza Cauduro

The work developed on this paper aims to exploit the adaptive nature that investors perceive risk and return, emphasizing the effects that context has on decision-preferences. Based on the concepts developed on the Adaptive Market Hypothesis and The Context Theory, the empirical analysis dissecting stock returns of Brazilian companies identified that investors adjusts and adapts its risk/reward expectations based on the broad market context. The methodology used in this paper measure and ranks the Brazilian listed securities by their respective F-Score, a fundamental measurement developed by Piotroski. The findings of this paper indicate that undervalued firms consistently and significantly outperforms overvalued firms, incurring in significantly lower risk.