Business Tutorial: Beta

A practical guide to achieving alpha when conventional measures of risk rarely correlate with higher returns. Falkenstein outlines prominent real examples of alpha in finance, and how the search for alpha affects the day-to-day life of all finance professionals.

Handbook of the Economics of Finance:
Volume 1A , Corporate Finance, & Volume 1B, Financial Markets and Asset Pricing

Unifying & bringing asset pricing, the systematic determination of values of risky securities as stocks, bonds, options, futures, & derivatives, up-to-date to benefit advanced students & professionals, John Cochrane traces all asset pricing back to this idea--price equals expected discounted payoff--that captures the macroeconomic risks underlying each security's value.

If options are correctly priced in the market, it should NOT be possible to make sure profits by creating portfolios of long & short positions in options & their underlying stocks. Using this principle, a theoretical valuation formula for options is derived.

Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market β, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in β that is unrelated to size, the relation between market β and average return is flat, even when β is the only explanatory variable