Systematic Interest-Rate Risk in a Two-Index Model of Returns

Bernell K. Stone

Journal of Financial and Quantitative Analysis, 1974, vol. 9, issue 5, 709-721

Abstract: In the linear market-index model of the return-generating process, return on security j is given bywhere αj and βj are constants characteristic of company j, is return on a market index, and is the company-specific component of return such that and . The coefficient βj is given by . It is known as market responsiveness, volatility, systematic risk, and, more commonly, simply as “beta.” It has been widely accepted as a measure of nondiversifiable risk and incorporated in popular performance measures. Many stock information services now provide estimates of beta.

Date: 1974
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