Irrelevance of Market Risk in Indonesia Stock Market
Dananjaya, Y., Magdalena, R.
This paper examines the effect of beta as proxy of market risk to stock return. In Capital Asset Pricing Model (CAPM) and various other finance theories, it is widely assumed that stock return is expected by investors as compensation for assuming risk. What kind of risk is being compensated? Based on Portfolio Theory, only market risk of the stock is being compensated. This is because stock’s individual risk has been diversified away in a fully diversified portfolio, and thus only market risk remains. Thus, stock return, as compensation for investor, is only depends on market risk. The widely used measurement for market risk of a stock is its beta. However, in this paper we show that there is no relation between beta and stock return in Indonesia stock market. The absence of beta – return relation is valid both in CAPM setting where beta is the only predictor and in Fama – French Three Factors Model where the predictors are beta, size, and Price to Earning Ratio (PER). In contrast, size and PER are related to stock return in the way predicted by the model.
Keywords: CAPM, Fama-French Three Factors Model, Beta, Stock Return, Market Risk.
|Title:||Irrelevance of Market Risk in Indonesia Stock Market|
|Author:||Dananjaya, Y., Magdalena, R.|
|Journal Name:||International Journal of Science and Business|
|ISSN:||ISSN 2520-4750 (Online), ISSN 2521-3040 (Print)|
|Date of Publication:||23/12/2021|
|Paper Type:||Research paper|
Cite This Article:
Dananjaya, Y. & Magdalena, R. (2021). Irrelevance of Market Risk in Indonesia Stock Market. International Journal of Science and Business, 5(11), 79-85. doi: https://doi.org/ 10.5281/zenodo.5801932
Retrieved from https://ijsab.com/wp-content/uploads/847.pdf
About Author (s)
Yanuar Dananjaya (corresponding author), Business School, Universitas Pelita Harapan Surabaya Campus, Surabaya, Indonesia.
Renna Magdalena, Business School, Universitas Pelita Harapan Surabaya Campus, Surabaya, Indonesia.