Using a design involving a between-subjects experimental manipulation, this study
surveyed 742 Finnish financial advisers about requiring a risk premium in one
mode and about expected returns in the other mode. Company-level risk factors
(e.g., leverage) caused an increased return requirement in the first mode but
led to lower return expectations in the second mode. Sensitivity to the form of
the question revealed an inconsistency in the advisers’ perception of risk
and return. Advisers seemed to associate safe stocks with relatively lower
discount rates (and thus higher valuations) but also with higher return
expectations. This inconsistency may contribute to the overpricing and
subsequent inferior performance of glamour stocks. Giving consistent advice is a
necessary condition for providing valuable client service.