Beta is in the Eye of the Beholder

Abstract

In Cascon and Shadwick (2006) we extensively discussed the use of models in finance. We pointed out how ideas that have become generally accepted often depend on assumptions that, as time passes, are likely to be unstated or even forgotten entirely, with potentially significant consequences. In this article we will use the same philosophy to examine the conventional model for alpha and beta in investment returns. As in Cascon and Shadwick (2007), we find here that the assumption that standard deviation is an appropriate proxy for risk plays a large role.

Keywords: Standard Deviation, Standard Dispersion, Alpha, Beta

JEL Classification: G11, G14