Time Horizon and the Beta Anomaly

Abstract

Stocks with high betas mainly attract individual investors willing to pay a premium for lottery-type payoffs. Although the beta anomaly shows up strongly in monthly returns, little is known about the long-term performance of these stocks. In this article, we examine the long-term returns of high versus low beta stocks using bootstrap simulations. We show that, although the returns of high-beta stocks display mean reversion and positive skewness, these effects cannot negate their low geometric mean returns. As such, high beta stocks remain a poor investment choice for long-term investors. This result is robust to different performance criteria, including the Sharpe ratio, asymmetric performance measures such as the upside potential and omega ratio, and prospect theory utility functions. Investors are unambiguously better off with a buy-and-hold strategy consisting of low beta stocks.

TOPICS: Security analysis and valuation, simulations