n Investment Analysts Journal - The impact of reference-day risk on beta estimation and a proposed solution

Volume 47 Number 4
  • ISSN : 1029-3523
  • E-ISSN: 2077-0227
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The ability to accurately estimate systematic risk (or beta) when referenceday risk is considered, is an ineluctable requirement for all applications of the capital asset pricing model (CAPM).

This research documents evidence of reference-day risk for shares on the Johannesburg All Share Index. In response to the need for greater accuracy when estimating systematic risk, this paper contributes a volume-weighted-average-price (VWAP) method for estimating beta which may be employed when reference-day risk is considered.

Furthermore, this research applies a graphical time-series approach to test the underlying risk-reward tenet postulated by the CAPM. Using beta as a measure of systematic risk, this research finds that the CAPM appears to imperfectly specify the risk-reward trade-off.

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