Volatility and Compounding Effects on Beta and Returns

The International Journal of Business and Finance Research, v, 6 (4) p. 1-11

12 Pages Posted: 29 Jan 2013

Date Written: 2012

Abstract

Previous research indicates that long-term investors are not compensated for beta or volatility risk. This study shows these two results are at least partly due to the mathematics of compounding exacerbated in high volatility markets. Theoretical beta portfolios defined to perform exactly as the Capital Asset Pricing Model (CAPM) would predict on a monthly basis, show that high beta portfolios dramatically outperform in low volatility environments and underperform in high volatility environments. Empirically sorted beta portfolios confirm the results and show in a low volatility environment, high beta portfolios outperform low beta portfolios by 0.42% a month and underperform by 0.51% in high volatility environments. When combining the two market environments, the inevitable result shows no relationship between beta and return.

Keywords: Beta, Compounding, Volatility

JEL Classification: G11

Suggested Citation

Trainor, William, Volatility and Compounding Effects on Beta and Returns (2012). The International Journal of Business and Finance Research, v, 6 (4) p. 1-11, Available at SSRN: https://ssrn.com/abstract=2149137

William Trainor (Contact Author)

East Tennessee State University ( email )

Department of Management and Marketing
Johnson City, TN 37614
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
406
Abstract Views
1,923
Rank
134,263
PlumX Metrics