The Price of Risk
AbstractThe relationship between risk and return is fundamental to financial asset pricing. Many commonly used financial asset pricing models require an annualised risk coefficient. Using the fundamental asumption that consecutive price changes are independent, annualised risk can be easily calculated from the asset risk over shorter time intervals. Recent empirical research however suggests that price changes are not independent, but rather exhibit long-term dependence. This paper will focus on the implications for investors of incorrectly measuring annualised risk. The outcomes of the paper will show that traditional measures of annualised risk are inappropriate when price changes do not follow a random walk, and will lead the investor to dramatically mis-estimate their real level of risk.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 86.
Date of creation: 01 Aug 1999
Date of revision:
Contact details of provider:
Postal: PO Box 123, Broadway, NSW 2007, Australia
Phone: +61 2 9514 7777
Fax: +61 2 9514 7711
Web page: http://www.uts.edu.au/about/uts-business-school/finance
More information through EDIRC
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Duncan Ford).
If references are entirely missing, you can add them using this form.