Systematic Risk and the Horizon Problem

Time Aggregation, Coefficient of Determination and Systematic Risk of The Market Model*

“…Jensen [9] has shown that the investment horizon affects systematic risk estimation while Levy [ 131 has demonstrated that the Sharpe performance measure can be biased if an inappropriate investment horizon is used in the empirical study. Cheng and Deets [3] have raised some questions about Jensen's instantaneous systematic risk estimation method, Hasty and Fielitz [7] have developed a model for dealing with the problem associated with heterogeneous horizon and Lee [ 101 has developed a method to test whether the investment horizon associated with individual security, portfolio, and mutual fund returns is instantaneous or not. Lee [113 also has derived the relationship between the estimated instantaneous systematic risk and the estimated finite systematic risk and Levhari and Levy [12] have derived relationships between the magnitude of estimated systematic risk and the length of the investment horizon, and have shown that the estimated Treynor performance measure is biased unless a correct investment horizon is used in the empirical analysis.…”

Arbitrage Pricing Theory and the Investment Horizon

“…In a subsequent study, Cheng and Deets (1973) contradict Jensen's results by showing that while the logarithmic transformations preserve linearity in CAPM, the estimates of the systematic risk resulting from that transformation are not independent of the horizon length over which measurements are made. Levy (1972) presents a theoretical analysis of the effect of the investment horizon on portfolio measures of performance.…”

Functional Forms and the Capital Asset Pricing Model

“…Respecification of the CAPM using functional form techniques is a direct result of earlier studies concerning the investment horizon and instantaneous risk (see [8], [12], and [3]). The model format proposed by Jensen in a discussion of the investment horizon was readily amenable to functional form tests.…”