Black Swans, Beta, Risk, and Return
18 Pages Posted: 16 Oct 2010
There are 4 versions of this paper
Black Swans, Beta, Risk, and Return
Black Swans, Beta, Risk, and Return
Black Swans, Beta, Risk, and Return
Black Swans, Beta, Risk, and Return
Date Written: October 15, 2010
Abstract
Beta has been a controversial measure of risk ever since it was proposed almost half a century ago, and we do not pretend to settle with this article what decades of research has not. We do, however, take advantage of the recent trend of investing in countries and industries through index funds and ETFs, as well as a renewed interest on the impact of black swans, and explore the merits of beta in that context. Ultimately, we ask two questions: 1) Is beta a good measure of risk? And, 2) is beta a valuable tool for portfolio selection? Our evidence, spanning over 47 countries, 57 industries, and four decades finds beta to be useful in both dimensions. When negative black swans hit the market, high-beta portfolios fall substantially more than low-beta portfolios. Furthermore, a strategy that reacts to black swans by selecting portfolios on the basis of beta outperforms a passive strategy in terms of both returns and risk-adjusted returns.
Keywords: Black swans, beta, investment strategies
JEL Classification: G11
Suggested Citation: Suggested Citation