Beta in Linear Risk Tolerance Economies

Abstract

This paper employs numerical means to examine: (i) the expected return-beta plot in power utility Linear Risk Tolerance (LRT) economies, and (ii) whether, in the power utility economies, a valuation equation containing covariance and coskewness terms might better explain expected returns than one containing covariance terms alone. The results show that the expected return-beta plots constructed from real world return distributions are very similar to the plots found in empirical tests of the Mean Variance Capital Asset Pricing Model (MV CAPM). Hence a power utility LRT CAPM may provide a better theory of asset pricing than the MV CAPM does. While beta is not the correct measure of risk in power utility LRT economies, the results show that on average a valuation equation containing covariance terms only explains expected returns better than a valuation equation containing both covariance and coskewness terms.portfolio selection, linear risk tolerance, utility functions, generalized risk measures, capital asset pricing

Exploring acceptable risk in engineering and operations research and management science by bibliometric analysis

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