Open main menu

In investing, upside beta is the element of traditional beta that investors do not typically associate with the true meaning of risk.[1] 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.

Contents

FormulaEdit

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.[2]

 

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)."[3] 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 model.

See alsoEdit

ReferencesEdit

  1. ^ James Chong; Yanbo Jin; G. Michael Phillips (April 29, 2013). "The Entrepreneur's Cost of Capital: Incorporating Downside Risk in the Buildup Method" (PDF). p. 2. Retrieved 26 June 2013.
  2. ^ Bawa, V.; Lindenberg, E. (1977). "Capital market equilibrium in a mean-lower partial moment framework". Journal of Financial Economics. 5: 189–200. doi:10.1016/0304-405x(77)90017-4.
  3. ^ Bawa, V.; Lindenberg, E. (1977). "Capital market equilibrium in a mean-lower partial moment framework". Journal of Financial Economics. 5: 189–200. doi:10.1016/0304-405x(77)90017-4.

External linksEdit