By |Published On: December 5th, 2012|Categories: Research Insights, Low Volatility Investing|

There are many blogs/funds/research promoting low beta stocks as a way to get rich:

In general, I’m still in the R&D stage of trying to determine if the low beta strategy (at least in the context of stock selection) is really that different than a “value” factor wrapped in some fancy new clothes. I realize everyone runs their Fama French regression to hold constant HML loadings, but I’m just skeptical…

Hong and Sraer have a pretty cool paper explaining why low-beta might exist as a stand alone anomaly. The basic idea is that stocks with betas above a certain cut-off point and where investors expect a wide dispersion of possible outcomes, end up being overvalued. Why?  Because in these high disagreement settings, investors who are extremely pessimistic about the stock will be unable to influence prices because of costly short-selling. Thus, on average, these higher beta, high disagreement stocks end up being overvalued.

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[Not all high beta is bad; just high beta and high disagreement!] The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Anyway, still digesting this paper, but thought it would be good to share.

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About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.

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