Within the framework of capital market theories, the systematic risk, which cannot be eliminated by diversification, is the sole relevant risk to which risk premium relates.
The purposes of this study are twofold. First, it estimates the relationship between the measure of systematic risk (beta) and characteristics of a firm. Second, it aims at improving the ability of predicting the future beta based on the information on the characteristics of a firm.
First, the stability of beta in Korean Stock Exchange Market was examined by the correlation and regression analyses of cross-sectional data. It was found that historical betas are a poor predictor for the future betas and they have reversion tendency toward mean (unity).
Second, regression analyses have been made using beta as the dependent variable and systematic Risk of a firm, debt to equity ratio, firm size and growth rate as independent variables. As the proxy variables for the systematic risk of a firm, industry (dummy) variables and covariance of sales volume were used. The results have shown that most variables have significant relationships with beta for the data for the entire period, 1976-79, but, for the data for two subperiods, the significance level is low and not consistent.
Third, prediction errors were analyzed using the naive prediction method(unity), historical beta and fundamental approach which bases its prediction on the characteristics of a firm. Bayesian adjusted beta proved to be a better predictor than unadjusted beta. The information on the characteristics of a firm is found to be useful to decrease the errors of prediction.
