Returns on negative beta securities: implications for the empirical SML

Dale Cloninger (), Edward Waller, Yvette Bendeck and Lee Revere

Applied Financial Economics, 2004, vol. 14, issue 6, 397-402

Abstract: Traditional textbook analysis either presumes or graphically depicts a monotonically positively sloped security market line (SML). Tests to empirically derive the SML also presume such a function. This paper argues that over the range of negative betas the SML is not positively sloped but negatively sloped. The SML over both negative and positive ranges, therefore, forms a 'V' shaped function with the point of the 'V' at a beta of zero and a return equal to the risk-free rate. Empirical tests confirm a negative sloped SML over the range of negative betas. The tests also indicate that the returns of negative beta securities equal or exceed those for their positive beta counterparts. Traditional theory suggests the returns of negative beta securities are less than the risk-free rate. The preliminary empirical analysis indicates otherwise.

Date: 2004
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DOI: 10.1080/09603100410001673621

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