Market model, CAPM, and beta forecasting

Cheng Few Lee

doi:10.1142/9789811202391_0079

Market model, CAPM, and beta forecasting

Cheng Few Lee

Rutgers Business School, Finance & Economics

Rutgers, The State University

Research output: Chapter in Book/Report/Conference proceeding › Chapter

Abstract

This chapter uses the concepts of basic portfolio analysis and dominance principle to derive the CAPM. A graphical approach is first utilized to derive the CAPM, after which a mathematical approach to the derivation is developed that illustrates how the market model can be used to decompose total risk into two components. This is followed by a discussion of the importance of beta in security analysis and further exploration of the determination and forecasting of beta. The discussion closes with the applications and implications of the CAPM, and the appendix offers empirical evidence of the risk-return relationship. In this chapter, we define both market beta and accounting beta, and how they are determined by different accounting and economic information. Then, we forecast both market beta and accounting beta. Finally, we propose a composite method to forecast beta.

Original language	American English
Title of host publication	Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning (In 4 Volumes)
Publisher	World Scientific Publishing Co.
Pages	2673-2711
Number of pages	39
ISBN (Electronic)	9789811202391
ISBN (Print)	9789811202384
DOIs	https://doi.org/10.1142/9789811202391_0079
State	Published - Jan 1 2020

ASJC Scopus subject areas

Economics, Econometrics and Finance(all)
General Business, Management and Accounting

Keywords

Accounting beta
CAPM
Composite forecasting
Market beta
Market model
Non-systematic risk
Systematic risk
Total risk

Access to Document

10.1142/9789811202391_0079

Cite this

@inbook{697a991a8fac4eabaa0dab0dbb4a05ad,

title = "Market model, CAPM, and beta forecasting",

abstract = "This chapter uses the concepts of basic portfolio analysis and dominance principle to derive the CAPM. A graphical approach is first utilized to derive the CAPM, after which a mathematical approach to the derivation is developed that illustrates how the market model can be used to decompose total risk into two components. This is followed by a discussion of the importance of beta in security analysis and further exploration of the determination and forecasting of beta. The discussion closes with the applications and implications of the CAPM, and the appendix offers empirical evidence of the risk-return relationship. In this chapter, we define both market beta and accounting beta, and how they are determined by different accounting and economic information. Then, we forecast both market beta and accounting beta. Finally, we propose a composite method to forecast beta.",

keywords = "Accounting beta, CAPM, Composite forecasting, Market beta, Market model, Non-systematic risk, Systematic risk, Total risk",

author = "Lee, \{Cheng Few\}",

note = "Publisher Copyright: {\textcopyright} 2021 by World Scientific Publishing Co. Pte. Ltd.",

year = "2020",

month = jan,

day = "1",

doi = "10.1142/9789811202391\_0079",

language = "American English",

isbn = "9789811202384",

pages = "2673--2711",

booktitle = "Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning (In 4 Volumes)",

publisher = "World Scientific Publishing Co.",

address = "United States",

}

TY - CHAP

T1 - Market model, CAPM, and beta forecasting

AU - Lee, Cheng Few

PY - 2020/1/1

Y1 - 2020/1/1

N2 - This chapter uses the concepts of basic portfolio analysis and dominance principle to derive the CAPM. A graphical approach is first utilized to derive the CAPM, after which a mathematical approach to the derivation is developed that illustrates how the market model can be used to decompose total risk into two components. This is followed by a discussion of the importance of beta in security analysis and further exploration of the determination and forecasting of beta. The discussion closes with the applications and implications of the CAPM, and the appendix offers empirical evidence of the risk-return relationship. In this chapter, we define both market beta and accounting beta, and how they are determined by different accounting and economic information. Then, we forecast both market beta and accounting beta. Finally, we propose a composite method to forecast beta.

AB - This chapter uses the concepts of basic portfolio analysis and dominance principle to derive the CAPM. A graphical approach is first utilized to derive the CAPM, after which a mathematical approach to the derivation is developed that illustrates how the market model can be used to decompose total risk into two components. This is followed by a discussion of the importance of beta in security analysis and further exploration of the determination and forecasting of beta. The discussion closes with the applications and implications of the CAPM, and the appendix offers empirical evidence of the risk-return relationship. In this chapter, we define both market beta and accounting beta, and how they are determined by different accounting and economic information. Then, we forecast both market beta and accounting beta. Finally, we propose a composite method to forecast beta.

KW - Accounting beta

KW - CAPM

KW - Composite forecasting

KW - Market beta

KW - Market model

KW - Non-systematic risk

KW - Systematic risk

KW - Total risk

UR - https://www.scopus.com/pages/publications/85096259244

UR - https://www.scopus.com/pages/publications/85096259244#tab=citedBy

U2 - 10.1142/9789811202391_0079

DO - 10.1142/9789811202391_0079

M3 - Chapter

SN - 9789811202384

SP - 2673

EP - 2711

BT - Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning (In 4 Volumes)

PB - World Scientific Publishing Co.

ER -

Market model, CAPM, and beta forecasting

Abstract

ASJC Scopus subject areas

Keywords

Access to Document

Other files and links

Fingerprint

Cite this