Forecasting Systematic Risk: Estimates of “Raw” Beta that Take Account of the Tendency of Beta to Change and the Heteroskedasticity of Residual Returns

Abstract

In the application of modern portfolio theory, the systematic risk of a security is of central importance. Beta (β), the future regression coefficient of the return of the security on the return of the market, is an index of that risk. Since the future is yet to be revealed, nonclairvoyant practitioners and researchers must rely on estimated rather than actual values of beta and the estimates must be based on data that are currently available.