Apr 25, 2011
Do high-beta stocks have high expected returns? Do stocks with historically above-average betas exhibit above-average realized returns?

EFF/KRF: We have written papers on this issue. The answer is consistently the same. Higher market betas tend to be associated with higher average returns, but the historical beta premium is much lower than predicted by the CAPM, and it is not statistically distinguishable from zero. Because of the high volatility of stock returns, however, estimates of the beta premium leave substantial uncertainty about the true premium. It may be much higher, or lower, than the historical estimate.

Eugene F. Fama
The Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business
Kenneth R. French
The Roth Family Distinguished Professor of Finance at the Tuck School of Business at Dartmouth College
This information is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Dimensional Fund Advisors and does not represent a recommendation of any particular security, strategy or investment product. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP.