MyAQR Education Strategies About Us HEDGE FUNDS Betting Against Beta January 1, 2014 - Andrea Frazzini Lasse H. Pedersen Topics - Hedge Funds Factor/Style Investing Defensive Betting Against Beta A basic premise of the capital asset pricing model (CAPM) is that all agents invest in the portfolio with the highest Sharpe ratio, or expected excess return per unit of risk, and leverage or de-leverage this portfolio to suit their risk preferences. However, many investors — such as individuals, pension funds and mutual funds — are constrained in the leverage that they can take, and therefore overweight risky securities instead. This behavior of tilting toward beta suggests high-beta assets require lower risk-adjusted returns than low-beta assets. Indeed, the security market line for U.S. stocks is too flat relative to the CAPM and is better explained by the CAPM with limited borrowing. This raises several questions: What is the magnitude of this anomaly relative to the size, value and momentum effects? Is betting against beta rewarded in other countries and asset classes? How does the return premium vary over time and in the cross section? How does one bet against beta? We address these questions by considering a dynamic model of leverage constraints and by presenting consistent empirical evidence from stock, bond, credit and futures markets in 20 countries. (We found relative flatness in 18 of 19 international equity markets, in many asset classes.) We show how this deviation from the standard CAPM can be captured using betting-against-beta factors. The return of the BAB factor rivals those of all the standard asset-pricing factors — value, momentum and size — in terms of economic magnitude, statistical significance, and robustness across time periods, sub-samples of stocks and global asset classes. — Fama/DFA Prize First Place 2015 Swiss Finance Institute Outstanding Paper Award 2011 Roger F. Murray Prize Third Place 2011 Research Journal Article Published In Journal of Financial Economics View Related Thinking Buffett's Alpha Journal Article - November 1, 2013 Leverage Aversion and Risk Parity Journal Article - January 1, 2012 Low-Risk Investing Without Industry Bets Journal Article - August 21, 2014 Data Sets Betting Against Beta: Equity Factors Data, Monthly October 31, 2021 Betting Against Beta: Original Paper Data February 27, 2018 AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which AQR.com has no control. 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