Price noise proves the key to high performing 'bets against beta' investment strategies

Beta is a measure of a stock’s volatility in relation to the overall market. Betting against beta (BAB) strategies have been developed that perform incredibly well for investors. The basic BAB strategy is to take a short position in assets with higher betas, and a longer position in assets with lower betas, on the grounds that higher beta assets are overpriced and the lower ones are underpriced. This approach results in large “positive alphas”—in other words, indications that the security is outperforming the market. The excellent performance of BAB strategies has generated academic interest and made them highly influential with practitioners.

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