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On the Relationship between the Systematic Risk and the Investment Horizon

Published online by Cambridge University Press:  19 October 2009

Cheng F. Lee
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Extract

Jensen [6] employed the instantaneous systematic risk concept to eliminate the problem associated with time horizon. Based upon the effective rate of return argument, Cheng and Deets [3] claimed that Jensen instantaneous risk is not independent of the time horizon used in the investment analysis. They have also proposed a so-called Cheng-Deets instantaneous risk to substitute for the Jensen instantaneous risk.

Following the log normal distribution assumption, this paper has shown that Cheng-Deets instantaneous risk is identical to Jensen instantaneous risk. The relationship between finite systematic risk and instantaneous risk is also identified. The roles played by the effective and the nominal rate-of-return concepts in the capital asset pricing process are also clarified. It is shown that both Jensen and CD instantaneous risks are biased unless the investment horizon is instantaneous. A testable generalized CAPM is derived to test the instantaneous investment horizon assumption. Finally, 30 securities of the Dow- Jones industrial average were used to test the generalized CAPM derived in this paper.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 11 , Issue 5 , December 1976 , pp. 803 - 815
Copyright
Copyright © School of Business Administration, University of Washington 1976

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References

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