Volatility and Compounding Effects on Beta and Returns

William Trainor

The International Journal of Business and Finance Research, 2012, vol. 6, issue 4, 1-11

Abstract: Previous research indicates that long-term investors are not compensated for beta or volatility risk. This study shows these two results are at least partly due to the mathematics of compounding exacerbated in high volatility markets. Theoretical beta portfolios defined to perform exactly as the Capital Asset Pricing Model (CAPM) would predict on a monthly basis, show that high beta portfolios dramatically outperform in low volatility environments and underperform in high volatility environments. Empirically sorted beta portfolios confirm the results and show in a low volatility environment, high beta portfolios outperform low beta portfolios by 0.42% a month and underperform by 0.51% in high volatility environments. When combining the two market environments, the inevitable result shows no relationship between beta and return.

Keywords: Beta Compounding; Volatility (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.theibfr2.com/RePEc/ibf/ijbfre/ijbfr-v6n4-2012/IJBFR-V6N4-2012-1.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ibf:ijbfre:v:6:y:2012:i:4:p:1-11

Access Statistics for this article

The International Journal of Business and Finance Research is currently edited by Terrance Jalbert

More articles in The International Journal of Business and Finance Research from The Institute for Business and Finance Research
Bibliographic data for series maintained by Mercedes Jalbert ( this e-mail address is bad, please contact ).