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

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  • Stone, Bernell K.

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.

Suggested Citation

  • Stone, Bernell K., 1974. "Systematic Interest-Rate Risk in a Two-Index Model of Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(5), pages 709-721, November.
    • Handle: RePEc:cup:jfinqa:v:9:y:1974:i:05:p:709-721_02
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