Beta and Return

Black, Jensen, and Scholes (1972) and Miller and Scholes (1972) find that in the period from 1931 through 1965, low-beta stocks in the US did better than the capital asset pricing model (CAPM) predicts, while high-beta stocks did worse. It is argued that beta is a value investment tool if the line i...

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Bibliographic Details
Published in:Journal of portfolio management 1993-10, Vol.20 (1), p.8-18
Main Author: Black, Fischer
Format: Article
Language:English
Subjects:
Beta
Capital assets
CAPM
Expected returns
Portfolio management
Regression analysis
Stocks
Studies
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Summary:Black, Jensen, and Scholes (1972) and Miller and Scholes (1972) find that in the period from 1931 through 1965, low-beta stocks in the US did better than the capital asset pricing model (CAPM) predicts, while high-beta stocks did worse. It is argued that beta is a value investment tool if the line is as steep as the CAPM predicts, and it is even more valuable if the line is flat. No matter how steep the line is, beta is alive and well. The portfolio method, used in Black, Jensen, and Scholes (BJS), is simple and intuitive. The portfolio method is illustrated by updating the BJS study using monthly data from the CRSP for the period 1926-1991. The BJS procedure is followed closely, except that at the very end, the analysis uses Black-Scholes method of estimating portfolio beta, alpha and residual risk at the same time. From the analysis, it is predicted that the line will steepen, but that low-beta stocks wil continue to do better than the CAPM says they should. Announcements of the death of beta seem premature.
ISSN:0095-4918
2168-8656
DOI:10.3905/jpm.1993.409462