Beliefs about Beta: Upside Participation and Downside Protection

106 Pages Posted: 1 Mar 2021 Last revised: 19 Jul 2022

Date Written: February 27, 2021


In three large online experiments, we study how investors assess the relationship between their portfolio and the stock market. Participants either select a portfolio of stocks or are randomly assigned a portfolio from a U.S. stock market index. They state their portfolio return expectations conditional on different market outcomes, allowing us to calculate implied beliefs about portfolio beta. We find a general underestimation of beta, which is particularly strong for downside beta. This asymmetric assessment of dependence is amplified for participants who select a portfolio themselves instead of receiving a randomly assigned portfolio. They believe their portfolio goes up with the market but does not come down with it. We confirm such biased beliefs about beta also in a sample of financial professionals and with several novel belief elicitation methodologies. Our findings reveal yet unknown patterns in beliefs about systematic risk, which shed light on the source of investor overconfidence.

Keywords: Return expectations, risk expectations, beta, diversification, overconfidence

JEL Classification: G11, G12, G41

Suggested Citation

Merkle, Christoph and Ungeheuer, Michael, Beliefs about Beta: Upside Participation and Downside Protection (February 27, 2021). Available at SSRN: or

Christoph Merkle (Contact Author)

Aarhus University ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000


Michael Ungeheuer

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101


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