Journal of Financial and Quantitative Analysis Vol. 30 No. 1 1995

The Conditional Relation between Beta and Returns

Glenn N. Pettengill¹; Sridhar Sundaram¹; Ike Mathur²

¹ Emporia State University · ² College of Business and Administration

Abstract

Unlike previous studies, this paper finds a consistent and highly significant relationship between beta and cross-sectional portfolio returns. The key distinction between our tests and previous tests is the recognition that the positive relationship between returns and beta predicted by the Sharpe-Lintner-Black model is based on expected rather than realized returns. In periods where excess market returns are negative, an inverse relationship between beta and portfolio returns should exist. When we adjust for the expectations concerning negative market excess returns, we find a consistent and significant relationship between beta and returns for the entire sample, for subsample periods, and for data divided by months in a year. Separately, we find support for a positive payment for beta risk.

DOI

10.2307/2331255

Volume

30

Issue

1

Pages

101

Sources

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