Investing in the Beta Space

Abstract

The beta space is a powerful way to map the investment strategies of semidiversified investors. Three metrics define the beta space: regular or exogenous betas (x-ßs), linked to macroeconomic cycles; endogenous betas (n-ßs), related to innovation hazards; and a combination of the two—the total betas (t-ßs). The beta space is the first to endow unsystematic risk with measurable entity. It debunks the myth that innovation entails high exogenous betas, and it suggests a simpler definition of style investing: Growth investors tend to favor industries with large t-ßs, whereas value investors do the opposite.