In
investing, upside beta is the element of traditional
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 ...
that investors do not typically associate with the true meaning of
risk.
It is defined to be the scaled amount by which an asset tends to move compared to a benchmark, calculated only on days when the benchmark’s return is positive.
Formula
Upside beta measures this
upside risk. Defining
and
as the excess returns to security
and market
,
as the average market excess return, and Cov and Var as the
covariance and
variance operators, the CAPM can be modified to incorporate upside (or
downside) beta as follows.
:
with downside beta
defined with the inequality directions reversed. Therefore,
and
can be estimated with a regression of excess return of security
on excess return of the market, conditional on excess market return being below the mean (downside beta) and above the mean (upside beta)."
Upside beta is calculated using asset returns only on those days when the benchmark returns are positive. Upside beta and downside beta are also differentiated in the
dual-beta In investing, dual-beta is the idea that the single regular market beta can be usefully replaced with two finer-grained measures, a downside beta and an upside beta.
Dual-beta vs Beta Models of Average Returns
The Capital Asset Pricing Model posit ...
model.
See also
*
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 ...
*
Downside risk
*
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