Tag Archives: CAPM

The low volatility anomaly and CAPM

A look at a paper that explores possible assumption failures of CAPM that would explain the low volatility anomaly. Previously We’ve talked about CAPM before, in particular: 4 and a half myths about beta in finance There has also been substantial talk about low volatility investing. The paper The paper is “Explanations for the Volatility … Continue reading

Posted in Quant finance | Tagged , , | 2 Comments

Beta and expected returns

Some pictures to explore the reality of the theory that stocks with higher beta should have higher expected returns. Figure 2 of “The effect of beta equal 1” shows the return-beta relationship as downward sloping.  That’s a sample of size 1.  In this post we add six more datapoints. Data The exact same betas of … Continue reading

Posted in Quant finance, R language | Tagged , , , , | Leave a comment

A brief history of S&P 500 beta

Data The data are daily returns starting at the beginning of 2007.  There are 477 stocks for which there is full and seemingly reliable data. Estimation The betas are all estimated on one year of data. The times that identify the betas mark the point at which the estimate would become available.  So the betas … Continue reading

Posted in Quant finance, R language | Tagged , , | 6 Comments

Realized beta and beta equal 1

What does beta look like in the out-of-sample period for the portfolios generated to have beta equal to 1? In the comments Ian Priest wonders if the results in “The effect of beta equal 1” are due to a shift in beta from the estimation period to the out-of-sample period.  (The current post will make … Continue reading

Posted in Quant finance, R language | Tagged , , , | 2 Comments

The effect of beta equal 1

Investment Performance Guy had a post about beta equal 1.  It made me wonder about the properties of portfolios with beta equal 1.  When I looked, I got a bigger answer than I expected. Data I have some S&P 500 data lying about from the post ‘On “Stock correlation has been rising”‘.  So laziness dictated … Continue reading

Posted in Quant finance, R language, Random portfolios | Tagged , , , | 12 Comments

A look at the quality of CAPM

Empirical Finance Blog has a post called “How to use the Fama French Model”. I find  the first part of the post most interesting.  This shows some examples of how the Capital Asset Pricing Model falls down.  I’ve trashed CAPM before in the form of “4 and a half myths about beta in finance”. The … Continue reading

Posted in Quant finance | Tagged , | Leave a comment

4 and a half myths about beta in finance

Much of what has been said and thought about beta in finance is untrue. Myth 1: beta is about volatility This myth is pervasive. Beta is associated with the stock’s volatility but there is more involved.  Beta is the ratio of the volatility of the stock to the volatility of the market times the correlation … Continue reading

Posted in Quant finance, R language | Tagged , , , | 12 Comments