An Investigation Into The Role Of The Market Portfolio In T

Unexpected deviations in underlying return-generating factors (RGF) must completely explain unexpected deviations in the return on the market portfolio in order for the multifactor return-generating process posited by the arbitrage pricing theory to be valid. Thus, the market portfolio must be the o...

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Bibliographic Details
Published inThe Financial review (Buffalo, N.Y.) Vol. 23; no. 3; p. 287
Main Authors Born, Jeffery A, Moser, James T
Format Journal Article
LanguageEnglish
Published Knoxville Blackwell Publishing Ltd 01.08.1988
Subjects
Arbitrage
Beta
CAPM
Mathematical analysis
Portfolio investments
Pricing
Theory
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Summary:Unexpected deviations in underlying return-generating factors (RGF) must completely explain unexpected deviations in the return on the market portfolio in order for the multifactor return-generating process posited by the arbitrage pricing theory to be valid. Thus, the market portfolio must be the only factor if it is to be an RFG. The results of the analysis suggest that the coefficient from a single-index model for asset returns should be reinterpreted. The coefficient obtained by regressing asset returns on returns from a single-index portfolio can be reinterpreted as a combination of the asset's return sensitivity to unexpected changes in underlying factors. A single-index beta, under ideal conditions, therefore, can be considered a consensus risk measure. The loss of information resulting from the construction of a single-dimension risk measure makes RGF sensitivity coefficients preferable. Relating single-index betas to factor sensitivity coefficients indicates that there are at least 3 RGFs.
ISSN:0732-8516
1540-6288