Investments, tenth edition

2

⁄

3 

sample beta

1

1

⁄

3 

(1) 

 (8.29)   

 

 

  

16

 A more sophisticated method is described in Oldrich A. Vasicek, “A Note on Using Cross-Sectional Information 

in Bayesian Estimation of Security Betas,”  Journal of Finance  28 (1973), pp. 1233–39. 

 For the 60 months used in  Table 8.3 , Intel’s beta was estimated at 1.60. Therefore, its 

adjusted beta is  

2

⁄

3

 3 1.60 1 

1

⁄

3

 5 1.40,  taking it a third of the way toward 1. 

 In the absence of special information concerning Intel, if our forecast for the market 

index is 10% and T-bills pay 4%, we learn from the beta book that the forecast for the 

rate of return on Intel stock is

    E(r

Intel

)

5 r

f

1 Adjusted beta 3 3E(r

M

)

2 r

f

4

 

5 4 1 1.40(10 2 4) 5 12.40%

  

 The sample period regression alpha is  2 1.0%. Because Intel’s beta is greater than 1, 

we know that this means that the estimate of the index model  a  is somewhat larger. 

 Example  8.1 

Adjusted Beta 

bod61671_ch08_256-290.indd   281

bod61671_ch08_256-290.indd   281

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Final PDF to printer

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P A R T   I I

  Portfolio Theory and Practice

As in Equation 8.28, we have to subtract (1  2   b )  r  

 f 

  from the regression alpha to obtain 

the index model  a . In any event, the standard error of the alpha estimate is .81%. The 

estimate of alpha is far less than twice its standard error. Consequently, we cannot reject 

the hypothesis that the true alpha is zero.