ON THE ASSESSMENT OF RISK: SOME FURTHER CONSIDERATIONS

Abstract

STATISTICALLY, a beta coefficient is the slope coefficient of a linear function relating the return on a security or portfolio to the return on a market index. Substantial interest has focused on beta coefficients because of hypothesis suggesting them as indices of asset risk. This concept arises from two sources: the market model developed in Sharpe [4] as a technique for portfolio analysis; and, the full equilibrium Capital Asset Pricing Model developed in Sharpe [5], Lintner [2], and Mossin [3]. Recently in this Journal, Marshall Blume [1] reported results of an empirical investigation of the stationarity of beta coefficients over time. In investigating this question, Blume estimated portfolio betas using monthly data over several successive seven year periods, and comparing the betas on successive intervals. His results indicated that beta coefficients were highly stable for portfolios containing large numbers of securities but unstable for individual securities.' The present paper presents results of research which investigated the impact of the length of the estimation interval on stability of the beta estimated. Using monthly data, betas were estimated using estimation intervals of one year, two years, four years, six years and nine years. The results indicate that the stability of the beta increases substantially as the length of the estimation interval increases.