Beta in Linear Risk Tolerance Economies

Robert R. Grauer
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Robert R. Grauer: Department of Economics, Simon Fraser University, Burnaby, British Columbia, Canada V5A 1S6

Management Science, 1985, vol. 31, issue 11, 1390-1402

Abstract: This paper employs numerical means to examine: (i) the expected return-beta plot in power utility Linear Risk Tolerance (LRT) economies, and (ii) whether, in the power utility economies, a valuation equation containing covariance and coskewness terms might better explain expected returns than one containing covariance terms alone. The results show that the expected return-beta plots constructed from real world return distributions are very similar to the plots found in empirical tests of the Mean Variance Capital Asset Pricing Model (MV CAPM). Hence a power utility LRT CAPM may provide a better theory of asset pricing than the MV CAPM does. While beta is not the correct measure of risk in power utility LRT economies, the results show that on average a valuation equation containing covariance terms only explains expected returns better than a valuation equation containing both covariance and coskewness terms.

Keywords: portfolio selection; linear risk tolerance; utility functions; generalized risk measures; capital asset pricing (search for similar items in EconPapers)
Date: 1985
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:31:y:1985:i:11:p:1390-1402

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