Risk is a four-letter word. So is beta. So are a few others. But what if more risk doesn’t necessarily mean more reward.
Beta, as a measure of volatility for a given stock against the overall market, tells us that we must increase our investment risks if we are to reap increased returns. Eric Falkenstein, author of Finding Alpha, seems to think otherwise.
In a study tracking total return versus beta from 1962 to 2010, Mr. Falkenstein found that lower beta stocks with less risk outperformed outperformed riskier stocks with higher betas. Norm Rothery of www.stingyinvestor.com provides the following graphic:
Mr. Falkenstein’s results are both counter-intuitive and striking: investors taking on less risk substantially outperformed those taking on more risk. Moreover, low beta portfolios seem to outperform the market as a whole. At the risk of talking our own books, we here at longrundata would like to postulate that the difference is dividends and dividend growth rates (longrun ones, of course). More to come…
H. Malovich,
August 29, 2011
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