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