Research On The Approach Of Estimating Invested Project’s Systematic Risk Based On The Information From Stock Market

Systematic risk is the most important dependent variable of the invested project’s cost ofcapital. And project as the unimplemented event, the systematic risk cannot be estimateddirectly. Thus researches focus on estimating it based on information from stock market (Thatis the comparable company method), for it is open, sufficiency and attainable. The CAPMproposed by Sharp (1964) is the classic one, it connects the financial market and corporatefinance; he suggested the systematic risk can be measured by β. In fact, most people get βfrom the database or calculate it by regression historical data, or else they set one figure whichis based on their experience. However, most of the researches provide that β is unstable, andwhich stock index/historical period(5years,3years…)/what returns(monthly, yearly…) isused would give a different β; and the most important one is the real market is inefficient,which indicate that we should not used the CAPMβ that include NTR to estimate the project’ssystematic risk. And the evolutions of Behavioral finance make it possible to settle suchissues.To explain the instability of β, researches on β’s Accounting determinants providingsome explanation, but this kind of research are mainly empirical researches that based on theresearchers’ experience or perception of the relationship between systematic risk andaccounting variables, never deduct why they have such relations based on theoretical research.This paper lighted up by the “effect of leverage on revenue flow to net profit”, conclude thedeterminate factors of systematic risk and study the “mechanism of systematic risk” andquantify the mechanism. It explored that the determinants of β are not only the systemic riskfactors, but also the nonsystemic factors; and once we figure out the determinants, we knowthe reason of β’s instability, then we should chose the comparable company which has morestable β to improve the regressing model’s efficiency. And we also supplement the standard ofselecting comparable company. The “mechanism of β” also implies the transfer relationshipbetween the CAPMβ and the Asset β which stands for the project’s systematic risk.Aim to the conflicting results of selecting stock index/historical period and returns, weconsider the sample’s β’s instability leads it. Therefore, this paper selects the stable one tostudy which stock index/historical period/return should be chosen. And we figure out the“HuShen300”,“5years” and “monthly returns” would increase the model’s efficiency. Alsothe conclusion can indicate the estimation of BAPMβ.The real market is inefficient, so that we should not use the CAPMβ which include NTRto estimate the project’s systematic risk. This paper explore two methods to isolate NTR(one is BAPM, and the other one is try to find the comparable company which is effected by a lowlevel NTR so we can ignore its NTR). And with BAPM, based on Shao (2009)’s twiceadjustment of Ramiah(2002)’s DVI, this paper suggests the third adjustment---the DVIsecurity portfolio should be contained300stocks which has higher turnover rate. anotherindication from previous study is that we should make a BAPMβ regression with the “5years”,“monthly returns”. This paper tests both of these two methods, and the result is theBAPM one is usable to isolate NTR, and the other one is not feasible, for though the NTR isless, but it cannot be ignored. And this conclusion also illustrate that NTR is systematic, to thewhole market, none can survived from it. Thus in the real inefficient market, all of thecomparable company should isolate NTR through BAPM.At last, this paper integrates the comparable company selection, stock index/historicalperiod/returns selection and isolating NTR form CAPMβ, to derive the approach of estimatinginvested project’s systematic risk based on the information from stock market, and show it bylogical chart. This paper invites somebody to test the approaches’ feasible, operability andefficiency. And we explore two methods to face the situation that we would not find out thecomparable companies, and this extends and enriches the researches of estimation of project’ssystematic risk.In all, this paper gets a more reality method to estimate the project’s risk, to support theproject investment decision makers and related financial departments, thus improve theirmakings.