Investments, tenth edition

 Figure 24.6 

Characteristic lines.  Panel A:  No market timing, beta is constant.   

 Panel B:  Market timing, beta increases with expected market excess return.  

 Panel C:  Market timing with only two values of beta.  

Slope = b

r

M

 

− r

f

Slope = b + c

r

P

 

− r

f

Steadily

Increasing

Slope

r

P

 

− r

f

r

M

 

− r

f

r

M

 

− r

f

Slope = .6

r

P

 

− r

f

A

B

C

 The numbers in parentheses are the regression estimates from the single variable regres-

sion reported in  Table 24.3 . The results reveal that portfolio  P  shows no timing. It is not 

clear whether this is a result of Jane’s making no attempt at timing or that the effort to time 

the market was in vain and served only to increase portfolio variance unnecessarily. 

 The results for portfolio  Q,  however, reveal that timing has, in all likelihood, success-

fully been attempted. The timing coefficient,  c,  is estimated at .10. The evidence thus sug-

gests successful timing (positive  c ) offset by unsuccessful stock selection (negative  a ). 

Note that the alpha estimate,  a,  is now 22.29% as opposed to the 5.28% estimate derived 

from the regression equation that did not allow for the possibility of timing activity. 

 This example illustrates the inadequacy of conventional performance evaluation tech-

niques that assume constant mean returns and constant risk. The market timer constantly 

shifts beta and mean return, moving into and out of the market. Whereas the expanded 

regression captures this phenomenon, the simple SCL does not. The relative desirability