Black Swans, Beta, Risk, and Return

18 Pages Posted: 16 Oct 2010

See all articles by Javier Estrada

Javier Estrada

IESE Business School

Maria Vargas

University of Zaragoza

Multiple version iconThere are 4 versions of this paper

Date Written: October 15, 2010


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

Estrada, Javier and Vargas Magallón, María, Black Swans, Beta, Risk, and Return (October 15, 2010). Available at SSRN: or

Javier Estrada (Contact Author)

IESE Business School ( email )

IESE Business School
Av. Pearson 21
Barcelona, 08034
+34 93 253 4200 (Phone)
+34 93 253 4343 (Fax)

María Vargas Magallón

University of Zaragoza ( email )

Gran Via, 2
50005 Zaragoza, Zaragoza 50005

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