CAPM Beta and Geopolitical Risk

Detta är en Master-uppsats från Lunds universitet/Nationalekonomiska institutionen

Sammanfattning: Recent years, geopolitical risks have dominated the news feed for the financial markets. There have historically been some geopolitical events that have resulted in major declines in the stock market and such a market day can be classified as a geopolitical Black Swan. The purpose of this essay is to investigate the area of CAPM beta and geopolitical risk where the main investigation is if beta is a useful tool for portfolio selection by taking advantage of negative geopolitical Black Swans. Additionally, this research investigates whether high-beta portfolios decline more than low-beta portfolios when the market falls significantly due to a geopolitical event. EURO STOXX 50 index is chosen as the survey index. Based on the findings of the study, it seems that beta is a good risk measure for geopolitical risk, at least for large and unexpected market declines due to geopolitical risk. This study also found that beta appears to be a useful tool for portfolio selection at least in terms of identifying portfolios that increase more than the market after a negative geopolitical Black Swan and decline less than the market after the following positive Black Swan. The results of this study also seem to show that the phenomenon of speed of reversion is a particularly important and crucial component when designing a beta-based Black Swan strategy.

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