On the Cross-sectional Relation between Expected Returns and Betas

Richard Roll and Stephen Ross

Journal of Finance, 1994, vol. 49, issue 1, 101-21

Abstract: There is an exact linear relation between expected returns and true 'betas' when the market portfolio is on the ex ante mean-variance efficient frontier but empirical research has found little relation between sample mean returns and estimated betas. A possible explanation is that market portfolio proxies are mean-variance inefficient. The authors categorize proxies that produce particular relations between expected returns and true betas. For the special case of a zero relation, a market portfolio proxy must lie inside the efficient frontier but it may be close to the frontier. Copyright 1994 by American Finance Association.

Date: 1994
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