USING BAYESIAN BETAS TO ESTIMATE RISK RETURN PARAMETERS: AN EMPIRICAL INVESTIGATION |
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| Authors: | J Austin Murphy |
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| Institution: | The author is Financial Economist, Federal Home Loan Bank Board, Washington. The helpful comments of the anonymous referee are gratefully acknowledged. |
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| Abstract: | Since its original development by Sharpe (1964), the Capital Asset Pricing Model (CAPM) has been the focus of great interest, practical usage, modifications, testing, and controversy. The basic hypothesis of the CAPM is that the minimum expected return required by investors on any asset will equal the risk-free rate plus a premium for the asset's contribution to the variance risk of a diversified portfolio as measured by the asset's beta. The model is often utilized by investors to calculate the relevant risk and required return on an asset, while corporate officers widely employ the theory to compute the appropriate discount rate to use in estimating the net present value of capital budgeting projects when evaluating spending decisions (Gitman and Mercurio, 1982). |
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