• Corpus ID: 54892440

The Conditional Relation between Beta and Returns

@inproceedings{Lanka2013TheCR,
  title={The Conditional Relation between Beta and Returns},
  author={Sri Lanka. and P. D. Nimal and Sandun D. Fernando},
  year={2013}
}

• S. Lanka., P. D. Nimal, S. Fernando
• Published 2013
• Business

The Capital Asset Pricing Model (CAPM) of Sharpe (1964), Lintner (1965), and Black (1972) (SLB) states that, in equilibrium, the expected return on a security is a positive linear function of its beta, and beta suffice to describe the cross-section of expected returns. The empirical studies on the validity of the positive beta-return relationship of the SLB model have been extensively carried out for the past four decades using average realized stock returns and an index of security returns to proxy for expected returns of stocks and market portfolio respectively. Early studies have supported the positive linear relationship between beta and return (e.g., Lintner (1965)). However, studies conducted after Fama and MacBeth (1973) (FM) have found inconsistent evidence on this relationship. For example, Fama and French (1992) conclude that the relationship between beta and average return is flat. In the Tokyo Stock Exchange (TSE), Nimal and Horimoto (2005) report that the beta and average return relationship is not significant in all months and even it is negatively significant in non-January months in some periods. Also in Sri Lankan context Samarakoon (1997) finds negative beta-return relationship and Anuradha (2008) reports insignificant beta-return relation in the Colombo Stock Exchange (CSE). The question is whether the inconsistent evidence on the relationship between beta and average return is sufficient to conclude that the movements of realized return are not systematically related with their betas1). Pettengill, The Conditional Relation between Beta and Returns