THE CONSTANCY OF PORTFOLIO RISK USING MUTUAL FUND DATA

Despite the usual assumptions of a stationary beta (risk) in the Capital Asset Pricing Model, recent research (Fabozzi and Francis, Kim and Zumwalt, Gooding and O\u27Malley, Umstead and Bergstrom, Robicheck and Cohn) has suggested that the capital market line is not stable in the short run but shifts over time in response to the changing economic climate. Research as old as Black, Jensen and Scholes (1972) and Friend and Blume (1970) shows capital market lines whose slope shifts over time. A model utilizing the Kalman filter is used to determine beta over time. Results indicate that beta is non-stationary for four of the thirty-five funds studied: Composite Bond & Stock Fund, Eaton Vance Income Fund, Selected American Shares and Value Line Fund. Kalman filter results were substantiated by the use of the Chow test on results using ordinary least squares. It is possible that Kalman filter results may underestimate the shifts in beta due to the presence of relatively large noise. The database consists of monthly returns for a sample of 35 mutual funds taken from the group used by Mains and Jensen. The sample has been extended to cover the period 1947 to 1982