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| Author: | Ehrhardt, M. C. |
| Title: | Diversification and interest rate risk |
| Journal: | Journal of Business Finance and Accounting
1991 : JAN, VOL. 18:1, p.43-59 |
| Index terms: | DIVERSIFICATION INTEREST RATES RISK TERM STRUCTURE OF INTEREST RATES |
| Language: | eng |
| Abstract: | Changes in the entire term structure of interest rates can be described by three orthogonal interest-rate factors. The interest-rate factors provide significant additional explanatory power for stock returns, above and beyond that afforded by the capital asset pricing model. The interest-rate sensitivity of a stock is related to both its industry type and its systematic market risk. Naive diversification, even with large portfolios, will not necessarily diversify away systematic interest-rate risk. The evidence regarding the existence of an interest-rate premium is inconclusive; it is not clear whether securities are compensated for bearing interest-rate risk. |
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