Isolating the Systematic and Unsystematic Components of a Single Stock's (or Portfolio's) Standard Deviation: A Comment
Posted: 18 Oct 2015
Date Written: July 24, 2015
In an article that recently appeared in this journal, Marshall (2015) argued that the systematic component of the SD of a stock or of a portfolio of stocks is its beta scaled by the SD of the market returns. She also contended that the beta mispredicts the actual systematic risk of a stock or of a portfolio of stocks. In this article, I dispute this conclusion, showing that it has been induced by an imperfection in the construction of the empirical application and by some misinterpretations of the results. A corrected replication of the empirical study of Marshall (2015) is provided, along with some comments. I conclude that both the beta and the systematic component in Marshall (2015) are effective measures of systematic risk.
Keywords: systematic risk, unsystematic risk, capital asset pricing model, beta, conditional correlation, conditional covariance
JEL Classification: G10, G11, A20
Suggested Citation: Suggested Citation