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On the Cross-sectional Relation between Expected Returns and Betas

Roll, Richard and Ross, Stephen A. (1994) On the Cross-sectional Relation between Expected Returns and Betas. Journal of Finance, 49 (1). pp. 101-121. ISSN 0022-1082.

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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. We 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.

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Additional Information:© 1994 the American Finance Association. We are grateful for comments from T. Daniel Coggin, Mark Grinblatt, John E. Hunter, Chi-Cheng Hsia, Andrew Lo, Simon Wheatley, three referees, the coeditor of the Journal, David Mayers, and the editor, René Stulz.
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Record Number:CaltechAUTHORS:20190506-162135861
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Official Citation:ROLL, R. and ROSS, S. A. (1994), On the Cross‐sectional Relation between Expected Returns and Betas. The Journal of Finance, 49: 101-121. doi:10.1111/j.1540-6261.1994.tb04422.x
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:95274
Deposited By: Tony Diaz
Deposited On:06 May 2019 23:24
Last Modified:03 Oct 2019 21:11

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