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2
votes
0answers
118 views

Best method for determining the market value of a stock before it is issued

I am attempting to determine the hypothetical market value of a stock for a company emerging from bankruptcy as of a date prior to actual the issuance of the stock. For example, let's say the formerly ...
2
votes
2answers
2k views

Are two stocks with the same beta have a correlation of 1?

If two stocks have the same beta over same time period, does it mean they are 100% correlated over that time period? In a CAPM framework, a stock's beta is defined as $$\beta_1={\rm Cov} (R_1, M) / {...
2
votes
0answers
207 views

Good criteria to sort state-space $\beta_{t}$ according to Kalman filter output

Let the usual state-space linear model (without constant term for the sake of simplicity): $y_{t}=\beta_{t} X_{t}+\epsilon_{t}$ If we use Gaussian Kalman filter to estimate $\beta_{t}$ we get $P_{t}$...
0
votes
0answers
394 views

what is a reasonable beta in CAPM?

I want to predict expected returns for assets using a CAPM, to calculate unexpected (unpredictable, idiosyncratic, non-systemic) returns in portfolios. My CAPM estimated on monthly total gross ...
1
vote
1answer
2k views

how to chain monthly excess returns into annual?

I want to calculate annual excess returns on portfolios using monthly returns for a CAPM (for the assets in the portfolio as well as for the benchmark), in order to have more information on the ...
2
votes
1answer
1k views

Counterintuitive time varying Beta with Kalman filter

If you're used to play with R, you'll enjoy the following reproducible code: ...
5
votes
4answers
514 views

Given two portfolios with identical correlation matrices, which one will have a better risk/reward ratio?

I have one portfolio with high beta stocks, and one with low beta stocks. Is it better to have higher expected return with high volatility, or medium expected return with medium volatility? (All from ...
1
vote
3answers
6k views

Annualized Covariance

I have two time series. One with monthly returns on an asset and one with monthly returns on a benchmark index. I have calculated the covariance using the ...
1
vote
1answer
472 views

Why does $\hat{\epsilon}'\hat{\epsilon}$ of a factor model measure risk?

$\hat{\epsilon}'\hat{\epsilon}$ from the market model: $R_{it} - \hat{\alpha} - \hat{\beta}R_{mt} = \hat{\epsilon}$, or from a factor model such as the Fama-French 3 factor model, is often used in the ...
3
votes
1answer
313 views

Average beta of index consitutents w.r.t. the index is 0.60

I have 1 year time series data of 300 constituents of the Australian All Ordinaries index (which is composed of 491 firms). The missing firms are mostly smaller firms. I run the market model $R_{it} =...
2
votes
1answer
476 views

Unsystematic and systematic risk of a portfolio

I have 8 country stock indexes and 1 world stock index. I do not actually have time series data but I'm given the following data: $\mu$, the vector of expected future returns for all 8 country ...
1
vote
1answer
2k views

Calculating portfolio allocation beta with different asset classes?

I'd like to calculate portfolio allocation beta on a portfolio that has different asset classes. The portfolio may be made up of: ...
10
votes
1answer
3k views

Why is the first principal component a proxy for the market portfolio, and what other proxies exist?

Let's say that I have a universe of stocks from a certain sector. I want to compute the market portfolio of this sector. Beta is the covariance between each stock and the market. But how do you ...
7
votes
3answers
677 views

How to account for jumps in intraday data when calculating beta?

I am calculating betas on intraday trade data at 15-minute intervals. For simplicity sake, let's assume I am modeling \begin{equation} Y = \beta * X + c \end{equation} where $Y$ is the return of XLF ...
6
votes
1answer
2k views

How does Kalman filtering of beta in pairs trading model work in R?

Could anyone show how this could be done in R? The dlm package seems to be a good start, but I can't really find any good examples to learn from. Currently I have ...
15
votes
4answers
827 views

Approximately what proportion of a stock’s volatility is explained by market movement?

Assume we decompose the daily (log) returns of a stock as beta times market movement plus an idiosyncratic part. If this is done ex-ante, what proportion of the variance is explained by the market ...
7
votes
2answers
335 views

How well does CAPM beta track the risk of a particular market relative to world markets?

Can the CAPM beta of emerging markets be less than the beta of the developed markets? As part of my research, I run regressions using market indices. I estimate the beta using a regression of MSCI ...
14
votes
5answers
2k views

is beta of a portfolio always meaningful?

Consider the following strategies: a stat arb strategy with no overnight exposure, but significant market exposure intraday. a market timing model which is always long or short the market. etc is ...