Measurement Approach to Decision Usefulness

Fama and French’s three factor model attempts to explain the variation of stock prices through a multifactor model that includes a size factor and BE/ME factor in addition to the beta risk factor. Fama-French model essentially extended the CAPM (which breaks up cause of variation of stock price into systematic risk which is non-diversifiable and idiosyncratic risk which is diversifiable) by introducing these two additional factors. Fama and French find that stocks with high beta didn’t have consistently higher returns than stocks with low beta and this indicates that beta was not a useful measure under their model. Their model is based on research findings that sensitivity of movements of the size and BE/ME factor constituted risk, and

The table below shows the equity betas for the firms presented in the case (using Jan-92 to Dec-96 equal weight NYSE/AMEX/NASDAQ as market portfolio):

1. True or False: According to the CAPM, a stock's expected return is positively related to its beta.

In the Fama & French paper, they found that: 1) stocks with high beta did not have consistently higher returns than low-beta stocks; 2)

For the beta of Papa John’s equity (PZZA), we regressed the monthly return on PZZA with

The beta measures the stock's volatility to the market. I would tell my friend to invest in Netflix, because they are recently expanding in international markets which will have a higher potential to expand their capacity. They are increasing their subscribers in the US and internationally everyday. Market return = 10% Risk-free rate = 3% Expected Return =10 +

The beta of a stock is used as a measure of systematic risk or volatility of a stock. Through our calculations we found that Ethan Allen’s beta was 1.21681 while the market average is 1. Thus, Ethan

When using the CAPM for assessing the risk of one project, it is important to determine both equity betas (also known as the geared betas) and asset betas. The asset betas in fact represent to total systematic risk of one company. The formula for the asset beta is defined as follows:

For estimation of betas, the above equation was run for the period from Jan, 2003 to Dec, 2006. Based on the estimated betas we have divided the sample of 63 stocks into 10 portfolios each comprising of 6 stocks except portfolio no.1, 5 and 10 having seven stocks each. The first portfolio 1 has the 7 lowest beta stocks and the last portfolio 10 has the 7 highest beta stocks. The rationale for forming portfolios is to reduce measurement error in the betas.

In the beginning of this investment period (9-9-2015), the igorpinto5 portfolio was properly distributed among 5 sectors: Services: Starbucks Corporation (30%), Banks: Goldman Sachs Group Inc. (28%), Industrials: JBS SA (23%), Technology: Amazon.com, Inc. (10%), and Homebuilding: D.R. Horton, Inc. (9%). The Igorpinto5 stock fund had close to no variation when compared to the market (9/15 until 11/13). Despite high volatility in the stock market in the period, the beta of the last four months of Igorpinto5 fund in relation to the S&P500 was 0.97. On 11/13/2015, the beta of Igorpinto5 represented

By definition beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns (Investopedia, 2011). According to Wikipedia (2011), in finance, CAPM is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable

Using CAPM: Risk Free Rate = 6%; Market Risk Premium = 5%; Beta = 1.2

Beta is used in the capital asset pricing model (CAPM) which is a model that calculates the expected return of an asset based on its beta and expected market returns. Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market and beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. Stock A has a beta of 1.315, so theoretically stock A is 31.5% more volatile than the market. Stock B has a beta of -.557 which means the stocks are a commodity.

However several critics noted that the small-cap’s outperformance on risk adjusted basis is a myth and by no means steady and consistent. Schwert

From Q6, all regressions models ran by Single Index Model, a model helps to split a security’s total risk into unique risk and market risk, α is the intercept of the single index model in which evaluate the expected excess return of the security , and β is the security’s sensitivity to the market index, while e represents the unsystematic risk of the security: