Be Careful With Your Low Beta Bets

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Low Beta Bets

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 the ratio of its volatility to the market index volatility….

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