You must specify the level of
beta risk of your portfolio that you intend to maintain and show how the beta values of the shares you have chosen produce/meet the chosen beta level for the portfolio.
The evolution of a year-adjusted
beta risk shows a 0.86 maximum average value in 2000.
(1995) using the dual-beta framework find consistent and significant relationship between beta and return and positive payment for
beta risk. For Australian resource and industrial sector, Faff (2001) finds contrary evidence that success of the model does not depend on a beta instability argument.
When testing whether the
beta risk of a given factor is priced, our misspecification robust standard error and the Jagannathan and Wang (1998) standard error (which is derived under the correctly specified model) can lead to different conclusions.
Consider the graph showing the equilibrium relationship between expected return and
beta risk under the CAPM (the security market line) in a typical stock market scenario:
The risk associated with making this mistake is called
beta risk. The unfortunate thing is that alpha risk and
beta risk are inversely related.
The volatility of log closing price change tends to understate the
beta risk and Sharpe ratio.
One of these is common time-variation in the fund's
beta risk and the expected market risk premium, related to public information on the state of the economy.
Program
Beta Risk Management Authority, Alamo, Calif.
However, a beta needs to be interpreted in light of the R-squared measurement that reflects the reliability of the
beta risk statistic.
The main implication of the CAPM is that expected return should be linearly related to an asset's covariance with the return on the market portfolio (i.e.,
beta risk).
