On the Assessment of Risk

Blume, Marshall E.

doi:10.1111/j.1540-6261.1971.tb00584.x

Cited by 572 publications

(287 citation statements)

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“…Since investors must be concerned with risk subsequent to making an investment, this raises the important question of whether beta can be predicted. Blume (1971) answers this in his article, On the Assessment of Risk.…”

Section: Risk Measurementmentioning

confidence: 99%

Three Centuries Of Asset Pricing

Dimson

Mussavian²

2000

SSRN Journal

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Theory on the pricing of ®nancial assets can be traced back to Bernoulli's famous St Petersburg paper of 1738. Since then, research into asset pricing and derivative valuation has been in¯uenced by a couple of dozen major contributions published during the twentieth century. These seminal works have underpinned the key ideas of mean± variance optimisation, equilibrium analysis and no-arbitrage arguments. This paper presents a historical review of these important contributions to ®nance. Ó 1999 Elsevier Science B.V. All rights reserved.

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Section: Risk Measurementmentioning

confidence: 99%

Three Centuries Of Asset Pricing

Dimson

Mussavian²

2000

SSRN Journal

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“…But, as a consequence, it becomes necessary to specify a dynamics for β t . Several works have started addressing this question (Blume, 1971;1975;Ohlson and Rosenberg, 1982;Lee and Chen, 1982;Bos and Newbold, 1984;Simmonds et al,1986;Collins et al, 1987) and have proved the merit of this approach. With regard to this question, both eq.…”

Section: Discussionmentioning

confidence: 99%

Self-consistent asset pricing models

Malevergne

Sornette

2007

Physica A: Statistical Mechanics and its Applications

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We discuss the foundations of factor or regression models in the light of the self-consistency condition that the market portfolio (and more generally the risk factors) is (are) constituted of the assets whose returns it is (they are) supposed to explain. As already reported in several articles, self-consistency implies correlations between the return disturbances. As a consequence, the alpha's and beta's of the factor model are unobservable. Self-consistency leads to renormalized beta's with zero effective alpha's, which are observable with standard OLS regressions. When the conditions derived from internal consistency are not met, the model is necessarily incomplete, which means that some sources of risk cannot be replicated (or hedged) by a portfolio of stocks traded on the market, even for infinite economies. Analytical derivations and numerical simulations show that, for arbitrary choices of the proxy which are different from the true market portfolio, a modified linear regression holds with a non-zero value α i at the origin between an asset i's return and the proxy's return. Self-consistency also introduces "orthogonality" and "normality" conditions linking the beta's, alpha's (as well as the residuals) and the weights of the proxy portfolio. Two diagnostics based on these orthogonality and normality conditions are implemented on a basket of 323 assets which have been components of the S&P500 in the period from Jan. 1990 to Feb. 2005. These two diagnostics show interesting departures from dynamical self-consistency starting about 2 years before the end of the Internet bubble. Assuming that the CAPM holds with the selfconsistency condition, the OLS method automatically obeys the resulting orthogonality and normality conditions and therefore provides a simple way to self-consistently assess the parameters of the model by using proxy portfolios made only of the assets which are used in the CAPM regressions. Finally, the factor decomposition with the self-consistency condition derives a risk-factor decomposition in the multi-factor case which is identical to the principal components analysis (PCA), thus providing a direct link between model-driven and datadriven constructions of risk factors. This correspondence shows that PCA will therefore suffer from the same limitations as the CAPM and its multi-factor generalization, namely lack of out-of-sample explanatory power and predictability. In the multi-period context, the self-consistency conditions force the beta's to be time-dependent with specific constraints.

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“…It is a stylized fact of empirical finance that the intercept and slope coefficients, commonly referred to as betas (β), are not stable over time, with evidence on beta instability dating back to the early 1970s (Blume, 1971(Blume, , 1975Gonedes, 1973;Meyers, 1973;Baesel, 1974;Bos and Newbold, 1984;Black et al, 1992; and Gonzalez-Rivera, 1997). Additionally, there is evidence that betas are less stable for individual securities than they are for portfolios: and that as the size of the portfolio increases, betas' stability also increases, reflecting the effects of diversification (Alexander and Chervany, 1980).…”

Section: Methodsmentioning

confidence: 99%

Risk and regulation in water utilities: a cross-country comparison of evidence from the CAPM

2014

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The full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-pro t purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. AbstractThis paper addresses a core issue for the regulated utility: what are the risks taken by investors in organizations that supply a product whose supply is regulated? Prior research on returns of regulated water supply and distribution companies in the United Kingdom concluded that regulation interacts significantly with equity returns and that the systematic risk and hence required returns of water utilities equity were low and decreasing over time (Buckland and Fraser, 2001). The current research analyses the returns on securities issued by regulated water companies in the differently-regulated economies of the UK and the USA, using data from 1980 to 2010. Mirroring the results from the 1990s, the evidence suggests that UK regulators have chronically overestimated the systematic risks borne by investors in water utilities, resulting in lax pressure on permitted returns and higher prices than are needed to provoke efficient supply. The analysis also confirms that there are striking differences between the regulatory risks and patterns of returns for private sector water utilities in the USA and the UK.

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On the Assessment of Risk

Cited by 572 publications

References 0 publications

Three Centuries Of Asset Pricing

Three Centuries Of Asset Pricing

Self-consistent asset pricing models

Risk and regulation in water utilities: a cross-country comparison of evidence from the CAPM

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