A note on the predictive ability of beta coefficients

PREVIOUS RESEARCH OFFERS THREE CONCLUSIONS ABOUT BETA COEFFICIENTS - 1. BETA STABILITY IS RELATIVELY SLIGHT FOR INDIVIDUAL SECURITIES, 2. THE BETA COEFFICIENT SHOWS REMARKABLE STABILITY OR PREDICTIVE ABILITY FOR PORTFOLIOS CONTAINING LARGE NUMBERS OF SECURITIES, AND 3. THE DEMONSTRATED STABILITY IS...

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Bibliographic Details
Published in:Journal of business research 1975-10, Vol.3 (4), p.365-372
Main Authors: Porter, R.Burr, Ezzell, John R.
Format: Article
Language:English
Subjects:
Beta
Portfolio management
Securities analysis
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Summary:PREVIOUS RESEARCH OFFERS THREE CONCLUSIONS ABOUT BETA COEFFICIENTS - 1. BETA STABILITY IS RELATIVELY SLIGHT FOR INDIVIDUAL SECURITIES, 2. THE BETA COEFFICIENT SHOWS REMARKABLE STABILITY OR PREDICTIVE ABILITY FOR PORTFOLIOS CONTAINING LARGE NUMBERS OF SECURITIES, AND 3. THE DEMONSTRATED STABILITY IS A POSITIVE FUNCTION OF THE NUMBER OF SECURITIES IN THE PORTFOLIO. THE LAST TWO CONCLUSIONS RESULT FROM THE PORTFOLIO SELECTION METHOD COMMON TO THE STUDIES, RATHER THAN FROM AN INHERENT TENDENCY FOR BETA STABILITY TO INCREASE AS THE NUMBER OF SECURITIES IN THE PORTFOLIO INCREASES. HIGH SENSITIVITY TO THE PROCEDURE USED TO SELECT PORTFOLIOS CAN BE DETECTED IN THE INTERTEMPORAL STABILITY OF THE BETA COEFFICIENT 'I.E., THE ABILITY OF HISTORICAL BETA TO PREDICT FUTURE BETA'. WHEN PORTFOLIOS ARE RANDOMLY SELECTED, THE TIME-STABILITY OF BETA IS RELATIVELY SLIGHT AND IT'S TOTALLY UNRELATED TO THE NUMBER OF SECURITIES IN THE PORTFOLIO. CHARTS.
ISSN:0148-2963
1873-7978
DOI:10.1016/0148-2963(75)90017-X