Beliefs about beta: upside participation and downside protection

Christoph Merkle and Michael Ungeheuer

Review of Finance, 2025, vol. 29, issue 5, 1397-1436

Abstract: In four large online experiments, we study how investors assess the relationship between stock portfolios and the market. Participants select or are randomly assigned a portfolio of stocks from a market index. They state portfolio return expectations conditional on different market outcomes, revealing implied beliefs about portfolio beta. We find general underestimation of beta which is stronger for downside beta. This asymmetry is amplified for participants who select their portfolio. They believe their portfolio goes up with the market but does not come down with it. We confirm biased beliefs about beta with financial professionals, monetary incentives, and alternative belief elicitation methods.

Keywords: return expectations; risk expectations; beta; diversification; overconfidence (search for similar items in EconPapers)
JEL-codes: G11 G12 G41 (search for similar items in EconPapers)
Date: 2025
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