Be Careful With Your Low Beta BetsGuest Post
Petri Jylha, Imperial College
Matti Suominen, Aalto University
Tuomas Tomunen, Columbia University
Betting against beta
All MBAs and Finance students learn in their basic finance courses the Capital Asset Pricing Model (CAPM), a celebrated theory largely attributable to the Nobel price winner William Sharpe. This theory states that riskier assets in equilibrium should earn higher returns, and that the relevant measure for a stock’s risk should be its “beta,” a measure of the stock’s systematic risk. Technically a stock’s beta equals its correlation with the stock market index, scaled by . . .
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