Understanding Risk: Lessons from Mutual Fund Disclosures 

We test whether our understanding of risk improves by integrating a distinct, qualitative representation: the forward-looking risk disclosures of mutual funds. First, we validate these disclosures by showing they align with funds' quantitative factor exposures. Second, we show the disclosures reveal new risk factors, including many tied to organizational frictions, that are orthogonal to canonical models and substantially increase the explanatory power for fund returns. Finally, we find these novel factors, particularly those reflecting organizational constraints, are systematically priced in the cross-section of individual stock returns, suggesting frictions within delegated asset management can become a priced source of systematic risk.

Speaking of Risk: Alignment Between Corporate and Fund Risk Disclosures