Beta dispersion and portfolio returns

Abstract

As any well-versed investor should know, there are many ways in which beta can be calculated based on factors such as the choice of time interval and market proxy used in the estimation process. Of course, this can lead to wide variation in beta estimates reported through publication sources. In this paper, we create portfolios based on the dispersion in the estimate of 27 different beta calculations. Defining stocks with higher variation in their beta estimates as higher risk, and consistent with risk-return theory, we find that portfolios of stocks with high dispersion across beta estimates outperform portfolios of stocks with low dispersion regardless of their level of systematic risk.