TY - JOUR T1 - Systematic Diversification Using Beta JF - The Journal of Investing SP - 144 LP - 151 DO - 10.3905/joi.2017.26.3.144 VL - 26 IS - 3 AU - Paul Bouchey AU - Tianchuan Li AU - Vassilii Nemtchinov Y1 - 2017/08/31 UR - https://pm-research.com/content/26/3/144.abstract N2 - Higher-risk investments deserve higher expected returns to compensate for the extra risk, or so theory tells us. Historically, this has not always been the case for U.S. and other developed-market stocks. This “beta anomaly,” which is now well established by academics, has started to gain traction with investors. This is demonstrated by the large flows into the numerous low-beta and low-volatility strategies that were established in the wake of the Global Financial Crisis. The authors examine the beta anomaly in the academic literature and provide an empirical analysis for stocks in the U.S., developed, and emerging markets. Their primary finding is that beta is not a strong predictor of expected returns, but it is useful when used to help reduce risk in a portfolio. The authors present results for an investment strategy that filters out the highest-beta stocks while controlling for concentration risks by country and sector. The study finds mixed results for beta as an anomaly: Low beta outperforms for international markets, underperforms in emerging markets, and is flat in the U.S. markets. None of these differences appears to be statistically significant. The authors find beta is very useful, however, as a tool for controlling risk, especially in the context of strategies that diversify across countries and sectors.TOPICS: Analysis of individual factors/risk premia, security analysis and valuation ER -