Beta and Systematic Risk

Abstract

The risk dogma believes that asset price is determined by a certain risk, while equilibrium pricing believes that asset price is determined by the market equilibrium of supply and demand. The analytical solution to the CAPM (capital asset pricing model) market equilibrium shows that beta is endogenous and is not a characteristic of individual securities, and time series betas and market betas have been confused. The risk dogma deviates from the wholeness thinking of equilibrium pricing and treats the pricing of individual securities in isolation. By analyzing the impact of changes in an asset's payoff on beta, we reveal situations that contradict the risk dogma, such as the beta changes, but the expected return remains unchanged.

Keywords: CAPM, Beta, Time Series Beta, Risk Dogma, Systematic Risk

JEL Classification: G12