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13
votes
4answers
744 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 ...
12
votes
5answers
1k 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 ...
8
votes
1answer
2k views

Which approach to estimating fundamental factor models is better, cross-sectional (unobservable) factors or time-series (observable) factors?

There are many approaches to estimating fundamental factor equity models. I would like to focus on two traditional methods: The time-series regression approach of Fama and French. Factors are ...
7
votes
1answer
2k 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 ...
6
votes
3answers
524 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
2answers
242 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 ...
6
votes
2answers
1k views

Beta vs. Implied Volatility statistical arbitrage using options

Let two underlyings, $S_{1}$ and $S_{2}$, are correlated and $\beta$ is the slope of their returns linear regression, that is, it says how much $S_{1}$ co-variates with $S_{2}$ variance. For ...
6
votes
1answer
1k 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 ...
6
votes
2answers
216 views

How to interpret beta meaningfully?

Although this is probably a basic question, this is probably also the right forum to post it in :) I thought I understood beta, but know I am really confused... The beta between my portfolio (weekly ...
4
votes
4answers
475 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 ...
3
votes
1answer
101 views

Beta and Frequency of Data

Why are the betas of individual securities essentially the same whether we use daily or weekly data when calculating?
3
votes
1answer
136 views

Estimating Beta from unevenly spaced price history

I have a certain non-stock asset that has 1 transaction every 1 to 8 months. I also have a price index of that class of asset compiled by another party on monthly basis. If I regress $price = \alpha' ...
3
votes
1answer
91 views

Beta and the Assumption of IID Returns

For two stocks that are independent and identically distributed (iid), do they have the same beta? Does the number of data points matter?
2
votes
1answer
1k views

Why do stocks with a negative beta return less than the risk free rate?

Let's say we have two stocks, Stock A and Stock B. Both of them have the same standard deviation $\sigma$, and therefore have the same risk. The only difference is that Stock A has a perfect ...
2
votes
2answers
599 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
1answer
218 views

annual excess returns from CAPM on monthly total returns

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
342 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 ...
2
votes
1answer
565 views

Counterintuitive time varying Beta with Kalman filter

If you're used to play with R, you'll enjoy the following reproducible code: ...
2
votes
0answers
85 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
0answers
143 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 ...
2
votes
1answer
253 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} ...
1
vote
1answer
1k 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: ...
1
vote
1answer
313 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 ...
1
vote
2answers
69 views

different amount of information on return correlations from shorter and longer periods?

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

right benchmark for an incompletely diversified international portfolio (for a CAPM): MSCI World or MSCI ACWI IMI?

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 ...
1
vote
3answers
2k 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
2answers
112 views

Beta arbitrage in CAPM

i'm following the "Computational Investing 1" course at Coursera.org, I was affascinated by the Beta arbitrage of CAPM Video: https://class.coursera.org/compinvesting1-002/lecture/view?lecture_id=119 ...
0
votes
2answers
137 views

Beta of FTSE100 stocks against benchmark index FTSE100

first post so if I write something silly don't hold it against me. I calculated beta for almost all the stocks that compose the FTSE100. All have beta < 1. This, as far as I understand it, means ...
0
votes
1answer
730 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 ...
0
votes
1answer
14k views

How to calculate unlevered beta

I have derived a firm's cost of equity using the WACC formula (see here), which means that the cost of equity has factored in the firms' debt (i.e. levered beta) and now I need to calculate the firm's ...
0
votes
2answers
104 views

How can I calculate Fama-French betas for a particular stock?

For a particular stock, what's the simplest way to calculate betas for the Fama-French factors SMB and HML?
0
votes
0answers
179 views

Downloading Quotes in CSV format from Yahoo Finance - Beta symbol?

By using http://finance.yahoo.com/d/quotes.csv?s=STOCKNAME&f=I am able to download a CSV file, does anyone know what the symbol for beta is? It should go after ...
0
votes
0answers
178 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 ...