The Stability and Predictability of Betas: Evidence from the Kuala Lumpur Stock Exchange
Beta measures the systematic or undiversifiable risk of a security. Investors desire stable (and hence predictable) measures of beta to enable them to accurately estimate the expected returns on their investment. Instable betas lead to inaccurate estimates of expected returns over time and hence p...
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| Main Authors: | , |
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| Format: | Article |
| Language: | English English |
| Published: |
Universiti Putra Malaysia Press
1994
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| Online Access: | http://psasir.upm.edu.my/id/eprint/3044/1/The_Stability_and_Predictability_of_Betas_Evidence_from.pdf http://psasir.upm.edu.my/id/eprint/3044/ |
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| Summary: | Beta measures the systematic or undiversifiable risk of a security. Investors desire stable (and hence predictable)
measures of beta to enable them to accurately estimate the expected returns on their investment. Instable betas
lead to inaccurate estimates of expected returns over time and hence provide misleading signals on performance
of investments. This study examines the stability and predictability of the three leads/lags version of FowlerRorke
betas (unlike OLS betas, these betas address the problem of thinness of trading peculiar to the KLSE) of
148 firms listed on the Kuala Lumpur Stock Exchange (KLSE). The findings suggest that the beta of both individual
securities and portfolios are quite stationary over time. As expected the portfolio betas are relatively more
stable than individual securities betas. Furthermore, the method of portfolio formation affects the relative portfolio
beta stability. However, portfolio beta stability is achieved with 15 or more securities, irrespective of method
of portfolio formation. Overall, the findings indicate that investors can reliably utilize estimated individual security
and portfolio betas for their portfolio selection and investment decisions. |
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