In general, I’m still in the R&D stage of trying to determine if the low beta strategy (at least in the context of stock selection) is really that different than a “value” factor wrapped in some fancy new clothes. I realize everyone runs their Fama French regression to hold constant HML loadings, but I’m just skeptical…
Hong and Sraer have a pretty cool paper explaining why low-beta might exist as a stand alone anomaly. The basic idea is that stocks with betas above a certain cut-off point and where investors expect a wide dispersion of possible outcomes, end up being overvalued. Why? Because in these high disagreement settings, investors who are extremely pessimistic about the stock will be unable to influence prices because of costly short-selling. Thus, on average, these higher beta, high disagreement stocks end up being overvalued.
Anyway, still digesting this paper, but thought it would be good to share.
After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.
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