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The Prediction of Systematic and Specific Risk in Common Stocks

Published online by Cambridge University Press:  19 October 2009

Barr Rosenberg  and
Walt McKibben
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Extract

Ex ante predictions of the riskiness of returns on common stocks — or, in more general terms, predictions of the probability distribution of returns — can be based on fundamental (accounting) data for the firm and also on the previous history of stock prices. In this article, we attempt to combine both sources of information to provide efficient predictions of the probability distribution of returns. We predict two parameters of the distribution of returns for each security in each year: the response to the overall market return (β), and the variance of the part of risk, specific to the security, that is uncorrelated with the market return. A cross section of time series data on returns and accounting variables, taken primarily from the Compustat tape, is used. Several recent developments in statistical methodology are applied.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 8 , Issue 2 , March 1973 , pp. 317 - 333
Copyright
Copyright © School of Business Administration, University of Washington 1973

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