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On the Diversification, Observability, and Measurement of Estimation Risk

Published online by Cambridge University Press:  06 April 2009

Pete Clarkson
Affiliation:
Simon Fraser University, Faculty of Business Administration, Burnaby, British Columbia, CanadaB5A 1S6
Jose Guedes
Affiliation:
Simon Fraser University, Faculty of Business Administration, Burnaby, British Columbia, CanadaB5A 1S6
Rex Thompson
Affiliation:
Southern Methodist University, Cox School of Business, P.O. Box 750333, Dallas, TX 75272

Abstract

This paper reexamines how risk return relationships are affected by investor uncertainty about the exact parameters of the joint rate of return distribution. We attempt to clarify results relating to three central issues. First, we address the issue of diversification, focusing on an APT, factor model framework. Second, we discuss the observability of estimation risk and describe research experimental designs that should encompass the existence of estimation risk and reveal it in the data. Finally, we suggest exploiting contemporaneous return observations on high and low information securities to aid in the measurement of return parameters for low information securities.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 1996

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