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Review of Finance Vol. 29 No. 5 2025

Beliefs about beta: upside participation and downside protection

Christoph Merkle1,2; Michael Ungeheuer3

1 Department of Economics and Business Economics, Aarhus University BSS , Fuglesangs Allé 4 , Aarhus 8210, · 2 Danish Finance Institute (DFI) , Solbjerg Plads 3, A5.04 , Frederiksberg 2000, · 3 Department of Finance, Aalto University School of Business , Ekonominaukio 1 , Espoo 02150,

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.

DOI
10.1093/rof/rfaf028
Volume
29
Issue
5
Pages
1397-1436
Language
en
Sources
bibtex:phds-export.bib crossref openalex

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