ON THE ASSESSMENT OF RISK

ON THE ASSESSMENT OF RISK Rit = Ut + ~$lt + Elt, (1) where the tilde indicates a random variable, ai is a parameter whose value is such that the expected value of Sit is zero, and ~i is a parameter appropriate to asset i.2 That the random variables Sit are assumed to be independent and * University of Pennsylvania. 1. In this paper, return will be measured as the ratio of the value of the investment at time t with dividends reinvested to the value of the investment at time (t-l). Dividends are assumed reinvested at time t, 2. The parameter Ili is defined as Cov (~, M)!Var (M). The Journal oj Finance unique to asset i implies that Cov (fit, Mt) is zero and that Cov (Eit, £jt), i =1= j, are zero. This last conclusion is tantamount to assuming the absence of industry effects. The empirical validity of the market model as it applies to common stocks listed on the NYSE has been examined extensively in the literature," The principal conclusions are: (1) The linearity assumption of the model is adequate." (2) The variables fit cannot be assumed independent between securities because of the existence of industry effects. However, these http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

ON THE ASSESSMENT OF RISK

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Publisher
Wiley Subscription Services, Inc., A Wiley Company
Copyright
1971 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1971.tb00584.x
Publisher site
See Article on Publisher Site

Abstract

Rit = Ut + ~$lt + Elt, (1) where the tilde indicates a random variable, ai is a parameter whose value is such that the expected value of Sit is zero, and ~i is a parameter appropriate to asset i.2 That the random variables Sit are assumed to be independent and * University of Pennsylvania. 1. In this paper, return will be measured as the ratio of the value of the investment at time t with dividends reinvested to the value of the investment at time (t-l). Dividends are assumed reinvested at time t, 2. The parameter Ili is defined as Cov (~, M)!Var (M). The Journal oj Finance unique to asset i implies that Cov (fit, Mt) is zero and that Cov (Eit, £jt), i =1= j, are zero. This last conclusion is tantamount to assuming the absence of industry effects. The empirical validity of the market model as it applies to common stocks listed on the NYSE has been examined extensively in the literature," The principal conclusions are: (1) The linearity assumption of the model is adequate." (2) The variables fit cannot be assumed independent between securities because of the existence of industry effects. However, these

Journal

The Journal of FinanceWiley

Published: Mar 1, 1971

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