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 returns obviously have some outliers. Instead of throwing out the outlier months, I think I need to ignore entire assets with outlier betas. What range of betas would one consider reasonable?
My model is nothing more complicated to use the 1999-2007 monthly returns relative to the MSCI World total gross returns, and predict for the same period.
(Btw, I know my suggestion makes the beta calculation for the entire portfolio invalid, but I think I can take that loss as I cannot price everything in the portfolio, let alone considering hedging against the investor's consumption stream, swings in human capital, earnings potential, pension claims etc. anyway.)