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Duration‐adjusted betas

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  • Oscar Varela

Abstract

This paper proposes duration‐adjusted betas for the three‐factor model betas that include risk associated with the firm's dividend policy. It extends Varela (Journal of Portfolio Management, 41, 2015, 122) who shows dividend policy as relevant to the stock's risk even in perfect markets, because the stock's duration is lower when cash dividends are higher. The three‐factor model's betas measure the effects of the market portfolio, size, and value premiums on the stock's required return. The stock's duration measures its required return's effects on its price. In combination, adjusting the stock's three‐factor betas for duration accounts not only for the effects of each factor on its required return, but also for the effect of the required return on its price. Overall, investors seeking lower risks, that is lower duration‐adjusted betas, should consider firms with policies that promote higher cash dividends.

Suggested Citation

  • Oscar Varela, 2022. "Duration‐adjusted betas," Review of Financial Economics, John Wiley & Sons, vol. 40(2), pages 168-173, April.
    • Handle: RePEc:wly:revfec:v:40:y:2022:i:2:p:168-173
    DOI: 10.1002/rfe.1144
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    References listed on IDEAS

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