Black Swans, Beta, Risk, and Return

Javier Estrada, María Vargas Magallón
2010 Social Science Research Network  
Beta has been a controversial measure of risk ever since it was proposed almost half a century ago, and we do not pretend to settle with this article what decades of research has not. We do, however, take advantage of the recent trend of investing in countries and industries through index funds and exchangetraded funds (ETFs), as well as a renewed interest on the impact of black swans, and explore the merits of beta in that context. Ultimately, we ask two questions: 1) Is beta a good measure of
more » ... risk? And, 2) is beta a valuable tool for portfolio selection? Our evidence, spanning over 47 countries, 57 industries, and four decades finds beta to be useful in both dimensions. More precisely, when negative black swans hit the market, high-beta portfolios fall substantially more than low-beta portfolios; furthermore, a strategy that reacts to black swans by selecting portfolios on the basis of beta clearly outperforms a passive investment in the world market.
doi:10.2139/ssrn.1692490 fatcat:dbfn7iybpvel5jm72sdi2mg52a