For more information about beta and asset pricing see:
Finding Alpha by Eric FalkensteinAn innovative guide to finding alpha in a world where risk usually does not correlate with higher returns, Finding Alpha is a practical guide to achieving alpha when conventional measures of risk rarely correlate with higher returns. To start, author Eric Falkenstein, a PhD who has also been a risk manager and portfolio manager, walks readers through the Capital Asset Pricing Model (CAPM), as well as other well-documented theories about risk and return, and explores how these theories measure up to current empirical evidence being documented by researchers and academics. Rounding out the discussion, 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. Eric Falkenstein, PhD (Eden Prairie, MN), developed RiskCalc[TM], the world's leading scoring tool for evaluating private firm default risk, while at Moody's Risk Management Services.
Asset Pricing by John H. CochraneUnifying & 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. Models--consumption-based, CAPM, multifactor, term structure, & option pricing--derive as different specifications of the discount factor. The discount factor framework also leads to a state-space geometry for mean-variance frontiers and asset pricing models. It puts payoffs in different states of nature on the axes rather than mean and variance of return, leading to a new and conveniently linear geometrical representation of asset pricing ideas. Cochrane approaches empirical work with the Generalized Method of Moments, which studies sample average prices and discounted payoffs to determine whether price does equal expected discounted payoff. He translates between the discount factor, GMM, and state-space language and the beta, mean-variance, and regression language common in empirical work and earlier theory. The book also includes a review of recent empirical work on return predictability, value, and other puzzles in the cross section, & equity premium puzzles & their resolution. By using a single, stochastic discount factor rather than a separate set of tricks for each asset class. Cochrane builds a unified account of modern asset pricing. He presents applications to stocks, bonds, and options. Written to be a summary for academics & professionals as well as a textbook for advanced graduate students, this book condenses and advances recent scholarship in financial economics. It developed dramatically in the last few years due to advances in financial theory & econometrics.
Location: Pardee Stacks HG4636 .C56 2001
The Pricing of Options and Corporate Liabilities by Fischer Black (UChicago) & Myron Scholes (MIT)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. Since almost all corporate liabilities can be viewed as combinations of options, the formula & analysis that led to it are also applicable to corporate liabilities such as common stock, corporate bonds, & warrants. The formula can be used to derive the discount that should be applied to a corporate bond because of the possibility of default. An option is a security giving the right to buy or sell an asset, subject to certain conditions, within a specified period of time. An "American option" is one that can be exercised at any time up to the date the option expires. A "European option" is one that can be exercised only on a specified future date. The price that is paid for the asset when the option is exercised is called the "exercise price" or "striking price." The last day on which the option may be exercised is called the "expiration date" or "maturity date."
Publication Date: Journal of Political Economy; May/June 1973, Vol. 81, Issue 3, p637
The Cross-Section of Expected Stock Returns by Eugene F. Fama; Kenneth R. FrenchTwo 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
Publication Date: Journal of Finance. June 1992, Vol. 47, Issue 2, p427-465