I’m reading “A random walk down Wall Street” by Burton Malkiel - an amazing book
I’m kinda confused part about the relationship of beta and returns:
In a study published in 1992, Eugene Fama and Kenneth French divided all traded stocks into deciles according to their beta measures over the 1963-1990 period. Decile 1 contained the 10 percent of stock had the lowest betas, decline 10 container the 10 of that had the highest betas. The remarkable result… there was no relationship between the return of these decile portfolios and their measures.
Isn’t stock’s beta and it’s return just a matter of definition? I.e. if $1 invested into us total stock market index in 1963 was worth $2 in 1990, and stock A cost $1 in 1963 and 1990 it cost $3 then by definition it had a beta of 2. And therefore it’s returns as well were double of the total market. So, beta 2 = 2x return. A different stock B with beta 1 would have return have half that of stock A in the same period. And there you go, a pretty linear relationship, just based on definition alone
One thought that pops into my head was the relationship is between beta “expected returns” and not beta vs “returns”. I.e. if you compare the stock beta if last 6 months vs expected returns in the next 6 months on a rolling basis, then the relationship becomes a lot more complicated. The concept of “expected returns” has already been introduced in the book tho, so I’m confused why it doesn’t specify that
Or is there something else completely that I’m missing?
Submitted July 13, 2022 at 05:05PM by ses92 https://ift.tt/uq0vmES
