Investment Volatility : A critique of standard beta estimation and a simple way forward

Tofallis, C. (2008) Investment Volatility : A critique of standard beta estimation and a simple way forward. European Journal of Operational Research, 187 (3). pp. 1358-1367. ISSN 0377-2217
Copy

Beta is a widely used quantity in investment analysis. We review the common interpretations that are applied to beta in finance and show that the standard method of estimation – least squares regression – is inconsistent with these interpretations. We present the case for an alternative beta estimator which is more appropriate, as well as being easier to understand and to calculate. Unlike regression, the line fit we propose treats both variables in the same way. Remarkably, it provides a slope that is precisely the ratio of the volatility of the investment’s rate of return to the volatility of the market index rate of return (or the equivalent excess rates of returns). Hence, this line fitting method gives an alternative beta, which corresponds exactly to the relative volatility of an investment – which is one of the usual interpretations attached to beta.

visibility_off picture_as_pdf

picture_as_pdf
Investment_volatility_A_critique_of_standard_beta_estimation_Published_Version.pdf
subject
Published Version
lock
Restricted to Repository staff only

Request Copy

Atom BibTeX OpenURL ContextObject in Span OpenURL ContextObject Dublin Core MPEG-21 DIDL Data Cite XML EndNote HTML Citation METS MODS RIOXX2 XML Reference Manager Refer ASCII Citation
Export

Downloads