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Systematic Interest-Rate Risk in a Two-Index Model of Returns

Published online by Cambridge University Press:  19 October 2009

Bernell K. Stone
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Extract

In the linear market-index model of the return-generating process, return on security j is given by

where αj and βj are constants characteristic of company j, is return on a market index, and is the company-specific component of return such that and . The coefficient βj is given by . It is known as market responsiveness, volatility, systematic risk, and, more commonly, simply as “beta.” It has been widely accepted as a measure of nondiversifiable risk and incorporated in popular performance measures. Many stock information services now provide estimates of beta.

Type
Las Vegas Versus the Stock Market
Information
Journal of Financial and Quantitative Analysis , Volume 9 , Issue 5 , November 1974 , pp. 709 - 721
Copyright
Copyright © School of Business Administration, University of Washington 1974

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References

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