On the Instability of Betas

16 Pages Posted: 29 Feb 2004 Last revised: 2 Jun 2019

Date Written: May 28, 2019

Abstract

It is a big mistake to use betas calculated from historical data to compute the required return to equity. It is a mistake for seven reasons: because betas calculated from historical data change considerably from one day to the next; because calculated betas depend very much on which stock index is used as the market reference; because calculated betas depend very much on which historical period is used to calculate them; because calculated betas depend on what returns (monthly, daily,...) are used to calculate them; because very often we do not know if the beta of one company is lower or higher than the beta of another; because calculated betas have little correlation with stock returns; and because the correlation coefficients of the regressions used to calculate the betas are very small.

Keywords: Beta, CAPM, beta-ranked portfolios, historical beta, expected beta

JEL Classification: G12, G31, M21

Suggested Citation

Fernandez, Pablo, On the Instability of Betas (May 28, 2019). Available at SSRN: https://ssrn.com/abstract=510146 or http://dx.doi.org/10.2139/ssrn.510146

Pablo Fernandez (Contact Author)

IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)

HOME PAGE: http://web.iese.edu/PabloFernandez/

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