CHOOSING BUSINESS RISK MEASURES

by Popescu, Nela
Published in Romanian Journal of Economic Forecasting, 2005, volume 6 issue 3, 59-64

Abstract

Risk has become an important variable in many areas of research. Measures of risk have been included in research on corporate products diversification, international geographic diversification, vertical integration, business strategy and industry characteristics, organizational process and corporate structures. Debate regarding the appropriate specification of risk measures began with a study indicating that in the majority of industries studied, average company ROE (return on equity) was negatively related to variance in ROE.
Examining the various measures used in previous research, I found that different risk proxies result in different estimated corporate risk-return relations. While much of the controversy over risk measures has revolved around the empirical properties of alternative measures, the conceptual validity of existing risk measures also remains in question.

Keywords: risk analysis, capital pricing models, company ROE
JEL Classification: C51, D81, G11, G12