Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-15T06:58:56.997Z Has data issue: false hasContentIssue false
  • English
  • Français

Risk Decomposition: Variance or Standard Deviation—A Reexamination and Extension

Published online by Cambridge University Press:  06 April 2009

Tony van Zijl
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper reexamines and extends the work of Ben Horim and Levy [1], which argued that risk decomposition should be based on standard deviation rather than on variance. Their analysis showed that decomposition of variance is wrong when β < 0 and that, in general, this procedure produces incorrect estimates of undiversifiable risk. This paper shows that these conclusions also apply to the no-risk-free asset extended CAPM if risk is adjusted for the unavoidable risk associated with the global minimum variance portfolio.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 22 , Issue 2 , June 1987 , pp. 237 - 247
Copyright
Copyright © School of Business Administration, University of Washington 1987

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Ben-Horim, M., and Levy, H.. “Total Risk, Diversifiable Risk and Nondiversifiable Risk: A Pedagogic Note.” Journal of Financial and Quantitative Analysis, 15 (06 1980), 289–297.Google Scholar
[2]Black, F. “Capital Market Equilibrium with Restricted Borrowing.” Journal of Business, 45 (07 1972), 444–455.CrossRefGoogle Scholar
[3]Lintner, J. “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.” Review of Economics and Statistics, 47 (02 1965), 13–37.Google Scholar
[4]Mossin, J. “Equilibrium in a Capital Asset Market.” Econometrica, 34 (10 1966), 768–783.CrossRefGoogle Scholar
[5]Roll, R. “A Critique of the Asset Pricing Theory's Tests, Part I: On Past and Potential Testability of the Theory.” Journal of Financial Economics, 4 (03 1977), 129–176.CrossRefGoogle Scholar
[6]Rubinstein, M. “A Mean Variance Synthesis of Corporate Financial Theory.” Journal of Finance, 28 (03 1973), 167–181.Google Scholar
[7]Rubinstein, M. “A Comparative Statics Analysis of Risk Premiums.” Journal of Business, 46 (10 1973), 605–615.Google Scholar
[8]Sharpe, W. “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.” Journal of Finance, 19 (09 1964), 425–442.Google Scholar
[8]Sharpe, W.Portfolio Theory and Capital Markets. NY: McGraw-Hill Book Co. (1970).Google Scholar
[10]van Zijl, T. “A New Statement of the Extended Capital Asset Pricing Model.” Australian Journal of Management, 9 (12 1984), 67–86.CrossRefGoogle Scholar
[11]van Zijl, T. “Essays on Capital Asset Pricing.” Ph.D. Thesis, Victoria University, Wellington, NZ (1986).Google Scholar