In investing, dual-beta is the idea that the single regular market
beta
Beta (, ; uppercase , lowercase , or cursive ; grc, βῆτα, bē̂ta or ell, βήτα, víta) is the second letter of the Greek alphabet. In the system of Greek numerals, it has a value of 2. In Modern Greek, it represents the voiced labiod ...
can be usefully replaced with two finer-grained measures, a
downside beta In investing, downside beta is the beta that measures a stock's association with the overall stock market (risk) only on days when the market’s return is negative. Downside beta was first proposed by Roy 1952 and then popularized in an investment ...
and an
upside beta In Investment#In finance, investing, upside beta is the element of traditional Beta (finance), beta that investors do not typically associate with the true meaning of Financial risk, risk. It is defined to be the scaled amount by which an asset tend ...
.
Dual-beta vs Beta Models of Average Returns
The
Capital Asset Pricing Model
In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio.
The model takes into accou ...
posits that individual stock returns move with the overall stock market symmetrically, i.e., that their upside and downside betas are identical. The dual-beta model attempts to differentiate
downside risk
Downside risk is the financial risk associated with losses. That is, it is the risk of the actual return being below the expected return, or the uncertainty about the magnitude of that difference.
Risk measures typically quantify the downside ris ...
(risk of loss) from
upside risk In investing, upside risk is the uncertain possibility of gain. It is measured by upside beta. An alternative measure of upside risk is the upper semi-deviation. Upside risk is calculated using data only from days when the benchmark (for example S&P ...
(gain), both measured in terms of beta with respect to the market and not individual idiosyncratic risk.
Mathematically, neither the two betas nor their average needs to be similar to the overall single beta. However, under normal circumstances, the two betas often average to the single beta.
In practice, it is difficult to estimate the future downside market-beta. Indeed, the historical single beta is a better predictor of the future downside beta than the historical downside beta.
See also
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Cost of capital
In economics and accounting, the cost of capital is the cost of a company's funds (both debt and equity), or from an investor's point of view is "the required rate of return on a portfolio company's existing securities". It is used to evaluate new ...
*
Financial risk
Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financial ...
*
Macro risk Macro risk is financial risk that is associated with macroeconomics, macroeconomic or political factors. There are at least three different ways this phrase is applied. It can refer to economic or financial risk found in capital stock, stocks and f ...
References
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External links
A Study of Sharpe's asymmetric beta modelRethinking Valuation and Pricing Models, 1st Edition
Financial risk modeling
Finance theories