Daniel Moskala Advisor: Dr. Alan Kirkpatrick · Bibliography Baesel, Jerome B. “On the Assessment...
Transcript of Daniel Moskala Advisor: Dr. Alan Kirkpatrick · Bibliography Baesel, Jerome B. “On the Assessment...
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Daniel Moskala
Advisor: Dr. Alan Kirkpatrick
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What is Beta? Beta measures the risk associated with a security
Relative statistic
Modeling
Formal Definition: The covariance of a portfolio and the market relative to the variance of the market.
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What is Beta?Mathematical Representation:
Where the components can be expressed as:
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What is Beta? Example:
Portfolio Beta = 2
10% market increase 20% portfolio increase.
10% market decrease 20% portfolio decrease.
What if Beta = 1 or 0.5?
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Project Goal
To determine the effect that the state of the economy has on beta stability of a portfolio.
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Dow Jones Industrial Average
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12/14/2005 7/2/2006 1/18/2007 8/6/2007 2/22/2008 9/9/2008 3/28/2009 10/14/2009
DJI
A
Time
DJIA
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Methodology Isolate two time periods
Recessionary
National Bureau of Economic Research
Expansionary
Normal Expansionary Period Recessionary Period
|-----------|---------------------------------------------|------------|-------------------------------------|
12/1/05 2/1/06 10/1/07 12/1/07 8/1/09
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Dow Jones Industrial Average
5000
6000
7000
8000
9000
10000
11000
12000
13000
14000
15000
12/14/2005 7/2/2006 1/18/2007 8/6/2007 2/22/2008 9/9/2008 3/28/2009 10/14/2009
DJI
A
Time
DJIA
Normal Economic Growth
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Dow Jones Industrial Average
5000
6000
7000
8000
9000
10000
11000
12000
13000
14000
15000
12/14/2005 7/2/2006 1/18/2007 8/6/2007 2/22/2008 9/9/2008 3/28/2009 10/14/2009
DJI
A
Time
DJIA
Recession
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Methodology Create three portfolios:
1. Diversified Variety of sectors and industries
B = 1
2. Leisure Cruise, resort, casino
B > 1
3. Necessities Staple foods, supermarkets, utilities
B < 1
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Methodology Calculate betas throughout the normal economic
growth period and the recessionary period.
Calculate the standard deviation of the betas in each time period.
Test to see if there is a statistically significant change in the standard deviation.
F-test at 5% significance level
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Results
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Be
ta
Time
Diversified Beta
Diversified Beta
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Results
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Be
ta
Time
Leisure Beta
Leisure Beta
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Results
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Be
ta
Time
Necessity Beta
Necessity Beta
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Results
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Be
ta
Time
Diversified, Leisure, and Necessity Beta
Diversified Beta
Leisure Beta
Necessity Beta
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Results
Normal Economic Growth
Recession F-Test T-test
PortfolioType
Beta Mean
Standard Deviation
Variance Beta Mean
Standard Deviation
Variance P-Value P-Value
Diversified 0.88 0.0472 0.0022 0.94 0.0430 0.0018 0.3870 0.0050
Leisure 1.11 0.2793 0.0780 1.17 0.1741 0.0303 0.0760 0.2570
Necessities 0.71 0.1100 0.0121 0.66 0.0753 0.0057 0.1237 0.1063
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Results
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Be
ta
Time
Diversified, Leisure, and Necessity Beta
Diversified Beta
Leisure Beta
Necessity Beta
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Conclusions None of the portfolios had statistically significant
change in the standard deviation during the recession.
The recession did not effect beta stability at the 5% significance level.
High volatility regardless of the state of the economy.
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Discussion
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Be
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Leisure Beta
Leisure Beta
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Discussion Beta stability assumption does not consistently
hold.
Financial practitioners need to calculate high-risk portfolio betas frequently.
Two characteristics identified for beta stability:
Diversification
Low average beta
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Discussion
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Be
ta
Time
Diversified, Leisure, and Necessities Beta
Diversified Beta
Leisure Beta
Necessity Beta
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Discussion Further Study:
Find more determinants of beta stability
Show statistical significance
Keep track of your portfolio beta!
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Bibliography Baesel, Jerome B. “On the Assessment of Risk: Some Further Considerations.”
The Journal of Finance 29.5 (1974): 1491-1494.Web. Blume, Marshall E. “On the Assessment of Risk” The Journal of Finance
26.1 (1971): 1-10. Web. Chan, Louis K. C. and Josef Lakonishok. “Robust Measurement of Beta
Risk.” The Journal of Financial and Quantitative Analysis 27.2 (1992): 265-282. Web.
Ghysels, Eric. “On Stable Factor Structures in the Pricing of Risk: Do Time-Varying Betas Help or Hurt?” The Journal of Finance 53.2 (1998): 549-
573. Web. Gordon, Alexander J. and Norman L. Chervany.“On the Estimation and
Stability of Beta.” The Journal of Financial and Quantitative Analysis15.1 (1980): 123-137. Web.
Reilly, Frank K. And Keith C. Brown. Investment Analysis and Portfolio Management. US: South-Western Cengage Learning, 2009.