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The security market plane

Author

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  • Bernard Bollen
Abstract
The relation between market risk and asset returns can be modelled with the Security Market Line (SML), a positive linear relation between expected excess asset returns and the asset's β. Pettengill et al. (1995) make the case that tests of β must be conditioned upon excess market returns to obtain meaningful results. This study proceeds from and extends the work of Pettengill et al. (1995), and in the process introduces the notion of the Security Market Plane (SMP). The SMP is a conditional relation between expected excess asset returns, β and realized excess market returns and is derived directly from the market model. Econometric testing on equities traded at the Australian Securities Exchange (ASX) based on a model motivated by the SMP offers strong evidence of the relevance of β to asset returns. The analysis does not reject the hypothesis that factors other than the market portfolio may be relevant to excess portfolio returns.

Suggested Citation

  • Bernard Bollen, 2010. "The security market plane," Applied Financial Economics, Taylor & Francis Journals, vol. 20(15), pages 1231-1240.
    • Handle: RePEc:taf:apfiec:v:20:y:2010:i:15:p:1231-1240
    DOI: 10.1080/09603101003781448
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    References listed on IDEAS

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    1. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
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    Cited by:

    1. Bernard Bollen & Philip Gharghori, 2016. "How is β related to asset returns?," Applied Economics, Taylor & Francis Journals, vol. 48(21), pages 1925-1935, May.
    2. Salvatore J. Terregrossa & Veysel Eraslan, 2016. "An analysis of the relation between return and beta for portfolios of Turkish equities," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1168501-116, December.
    3. Salvatore J. Terregrossa & Veysel Eraslan, 2016. "Negative Currency-Risk-Exposure for Turkish Equities," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 4(2), pages 12-17.

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