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Abstract
A graphical comparison of CAPM beta and dual-beta estimates illustrates how different alpha values in up-market and down-market can muddle CAPM beta estimates. CAPM beta statistics from 23,060 investable assets are computed and compared against up- and down-market beta statistics estimated for the same group of assets. The empirical results demonstrate that it is common for the estimated beta to be more extreme in value than either the up-market or downmarket beta for a given asset. That is, estimated beta might be overstating risk, understating risk, or fairly representing risk and without other information, wealth managers and investors won’t know which statement is correct. The use of up-market and down-market alphas and betas can help wealth managers make better decisions about asset risk.
TOPICS: Performance measurement, risk management
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Regime-Switching Alpha and Errors in Beta
