Work detail

Asset pricing: Downside risk across U.S. industries

Author: Bc. Peter Palovič
Year: 2021 - summer
Leaders: Mgr. Ing. Matěj Nevrla
Consultants:
Work type: Bachelors
Language: English
Pages: 55
Awards and prizes:
Link:
Abstract: This thesis investigates the comparative relationship between the traditional
CAPM and the downside risk CAPM. It proposes an asset pricing model in
which the traditional CAPM beta and DR-CAPM beta are the risk factors.
The goal of this thesis is to examine whether DR-CAPM beta represents a
significant risk factor that could be used when computing the risk premium
of the portfolio in the market. Therefore, this thesis referred to the FamaMacBeth two-stage regression model that was applied over monthly data of
48 US industries’ realized returns ranging from January, 1970 to January,
2021. Results indicate a non-significant relationship between the risk factors (traditional and downside beta) and expected return. Hence, there is
no evidence that both factors have any significant explanatory power in the
cross-section of stock returns. Moreover, we performed a robustness check of
the results using univariate models, relative beta and unconditional approach.
All of these models confirmed our results from the conditional approach.

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