Upside beta
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.
Formula
[edit]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 also
[edit]References
[edit]- ^ 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.
- ^ Bawa, V.; Lindenberg, E. (1977). "Capital market equilibrium in a mean-lower partial moment framework". Journal of Financial Economics. 5 (2): 189–200. doi:10.1016/0304-405x(77)90017-4.
- ^ Bawa, V.; Lindenberg, E. (1977). "Capital market equilibrium in a mean-lower partial moment framework". Journal of Financial Economics. 5 (2): 189–200. doi:10.1016/0304-405x(77)90017-4.