On the Diversification, Observability, and Measurement of Estimation Risk

J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, March 1996

Posted: 10 Oct 1996

See all articles by Peter Clarkson

Peter Clarkson

University of Queensland - Business School; Simon Fraser University (SFU) - Beedie School of Business; Financial Research Network (FIRN)

José Correia Guedes

Catholic University of Portugal (UCP) - Faculty of Economic Science and Business Studies

Rex Thompson

affiliation not provided to SSRN

Abstract

This paper reexamines how risk return relationships are affected by investor uncertainty about the exact parameters of the joint rate of return distribution. We attempt to clarify results relating to three central issues. First, we address the issue of diversification, focusing on an APT, factor model framework. Second, we discuss the observability of estimation risk and describe research experimental designs that should encompass the existence of estimation risk and reveal it in the data. Finally, we suggest exploiting contemporaneous return observations on high and low information securities to aid in the measurement of return parameters for low information securities.

JEL Classification: G19

Suggested Citation

Clarkson, Peter and Correia Guedes, José Filipe and Thompson, Rex W., On the Diversification, Observability, and Measurement of Estimation Risk. J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, March 1996, Available at SSRN: https://ssrn.com/abstract=7804

Peter Clarkson

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

José Filipe Correia Guedes

Catholic University of Portugal (UCP) - Faculty of Economic Science and Business Studies ( email )

Lisboa, 1600
Portugal

Rex W. Thompson (Contact Author)

affiliation not provided to SSRN

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