# Should I convert monthly data into yearly for CAPM?

I am trying to use the CAPM. I gathered monthly data on German government bonds and DAX40 (it's an index that contains top 40 German firm). Then based on only one company like Volkswagen monthly stock return in the last 60 months I calculated the $$\beta$$ by regressing the return of the stock on the market.

Should I convert these monthly calculated data into yearly and then apply in the CAPM formula, or it's not necessary? If so, what is the formula for it?

## 1 Answer

I would turn the question around: first determine what frequency you want to use your model on, then decide what frequency you will estimate the beta from. Beta estimated on higher-frequency data may be smaller, as noise may dominate the signal. If you want to use the model on data of a given frequency, I think it makes sense to use the same frequency for estimating the beta, too.

• so for capm must beta, risk free and market return be in annual terms? i mean do i have to convert everything to annually or monthly is also ok? calculating from monthly data it would be of course easier to plug it in as is Commented Jan 18 at 14:36
• @MostafaBouzari, you can do it on monthly frequency. That is quite common. Commented Jan 18 at 15:05