Beta analysis on the US stock market

Abstract

This study conducts extensive research in the NYSE and S&P500 markets, exploring various investment strategies based on Beta. Throughout this work, I present results for 156 portfolios, structuring them according to the systematic risk characteristics of each stock. I investigate Beta, a measure of systematic risk, to build my portfolios. The "betting against beta" factor demonstrates considerable effectiveness applied across a broad spectrum of assets. This approach, which prioritizes investments in low-beta assets while reallocating resources from high-beta assets, consistently exhibits superior performance in risk-adjusted returns. Expanding on Frazzini & Pedersen (2014), I identify that those portfolios composed of low-beta assets provided robust returns and showed significant resilience to market volatility. I closely analyzed the impact of variations in the rolling window on the performance of beta-based portfolios. This analysis revealed how adjustments in beta calculation methodologies can influence the outcome of the strategy. The existing literature used 5-years for correlations to calculate beta. I expand this by exanimating 3-years to 7-years rolling window for correlations. My findings show that the strategy does not suffer major disturbances which highlight the robustness of the strategy. Future research can examine the effect of using larger rolling windows for volatility calculation. In summary, the results of this research strongly suggest the effectiveness of stock beta-based strategies, especially when applied in a context of broad asset diversification. These findings contribute to the advancement of academic knowledge and offer practical insights for investors in making informed and effective decisions.

Date of Award	7 May 2024
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Pedro Barroso (Supervisor)