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Is Gold a Zero-Beta Asset? Investment Potential of Precious Metals

Is Gold a Zero-Beta Asset? Investment Potential of Precious Metals

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Published by Cervino Institute
McCown, James Ross and Zimmerman, John R. "Is Gold a Zero-Beta Asset? Analysis of the Investment Potential of Precious Metals" Meinders School of business, Oklahoma City University (July 24, 2006).

Abstract: Gold shows the characteristics of a zero-beta asset. It has approximately the same mean return as a Treasury Bill and bears no market risk. Silver also bears no market risk but has returns inferior to Treasury Bills. Both gold and silver show evidence of inflation-hedging ability, with the case being much stronger for gold. The prices of both metals are cointegrated with consumer prices, showing additional evidence of hedging ability.

McCown, James Ross and Zimmerman, John R. "Is Gold a Zero-Beta Asset? Analysis of the Investment Potential of Precious Metals" Meinders School of business, Oklahoma City University (July 24, 2006).

Abstract: Gold shows the characteristics of a zero-beta asset. It has approximately the same mean return as a Treasury Bill and bears no market risk. Silver also bears no market risk but has returns inferior to Treasury Bills. Both gold and silver show evidence of inflation-hedging ability, with the case being much stronger for gold. The prices of both metals are cointegrated with consumer prices, showing additional evidence of hedging ability.

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Published by: Cervino Institute on Apr 01, 2010
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02/16/2013

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 Is Gold a Zero-Beta Asset? Analysis of the Investment Potential of Precious MetalsJuly 24, 2006James Ross McCown *Meinders School of BusinessOklahoma City University2501 N. Blackwelder Oklahoma City, OK 73106405-208-5473Email:
 jmccown@okcu.edu
John R. ZimmermanMeinders School of BusinessOklahoma City University2501 N. Blackwelder Oklahoma City, OK 73106Email: jrzimmerman4@yahoo.comJEL codes: E31, G11Keywords: gold, silver, inflation*Corresponding author.
 
Is Gold a Zero-Beta Asset? Analysis of the Investment Potential of Precious Metals
Abstract: Gold shows the characteristics of a zero-beta asset. It has approximately thesame mean return as a Treasury Bill and bears no market risk. Silver also bears no marketrisk but has returns inferior to Treasury Bills. Both gold and silver show evidence of inflation-hedging ability, with the case being much stronger for gold. The prices of bothmetals are cointegrated with consumer prices, showing additional evidence of hedgingability.
 
Is Gold a Zero-Beta Asset? Analysis of the Investment Potential of Precious Metals
The precious metals have been used as media of exchange and stores of value for millennia. Many investors have investments in gold or silver, in various forms, in their  portfolios. Yet in spite of their popularity as investments, there has been very littleresearch on their performance as compared with the research on stocks or bonds. Thisstudy examines the investment performance of the metals using the traditional asset pricing models used to evaluate securities.We find that an investment in gold bullion adds no systematic risk to an investor’s portfolio. An estimate of the capital asset pricing model yields a beta that is statisticallyindifferent from zero. This is consistent with the returns on gold for the period from 1970to 2003, which have been just slightly higher than the Treasury Bill rates. Estimates of the CAPM for silver also result in a zero estimated beta, but silver has had returns that arefar lower than the Treasury Bill rate.Estimates of the arbitrage pricing model reveal that gold has a strong ability to hedgeagainst inflation risk, and can thus be a very useful addition to an investor’s portfolio.Silver can also be useful in hedging inflation, but the evidence is weaker.For the most important contribution of this research, we find that the time series of bothgold and silver prices are cointegrated with the Consumer Price Index in the U.S. This

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