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The Beta Anomaly

In: The Lottery Mindset: Investors, Gambling and the Stock Market

Author

Listed:
  • Wai Mun Fong

    (National University of Singapore)

Abstract

The notion that high-beta stocks should earn higher average returns than low-beta is the cornerstone of modern finance. Empirical evidence not only does not support this prediction, high-beta stocks underperform low-beta stocks on a risk-adjusted basis. The beta anomaly is large, persistent, and exists in a variety of asset classes. This chapter argues and provides empirical evidence that lottery stock preferences combined with institutional constraints that limit arbitrage are important drivers of the beta anomaly. While gamblingprone investors pay the price for high-beta stocks in terms of poor returns, over the long run, investors of low-beta stocks benefit not only from the superior returns of these stocks but also from the boost in geometric mean returns that comes with low-risk investing.

Suggested Citation

  • Wai Mun Fong, 2014. "The Beta Anomaly," Palgrave Macmillan Books, in: The Lottery Mindset: Investors, Gambling and the Stock Market, chapter 5, pages 101-121, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-38173-6_5
    DOI: 10.1057/9781137381736_5
    as

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