The momentum of beta!

Numerous studies show how low beta investment strategies have outperformed relative to high beta.  Data from Eric Falkenstein’s site illustrates this over the last 50 years:

blog figs

However, there are clearly periods when high beta returns are higher (for example the 1990s).  What if we switch monthly to the strategy with the highest return in the previous month?

blog figs

$1 now returns $1000, or 15% annually, up from 12%.

This test is frictionless, with switches occurring approximately every 2 years.  (Testing is ongoing).  Currently SPLV and SPHB could be employed; of course these instruments are only recently available.

The next post looks at combining these returns with the RecessionAlert model to see whether they can be improved.

 

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4 thoughts on “The momentum of beta!

  1. Hi there,
    You write “This test is frictionless, with switches occurring approximately every 2 years”, but I thought the test was conducted doing monthly rebalances based adopting last month’s stronger one. Are you saying that despite the strategy executing a monthly review the switches naturally shifted about every two years (with each one prevailing for two years)?

  2. Eric’s data seem a bit obscure: e.g. I see that on 196208 the “value” for the high beta series was 433.45 while in the next month, 196209, it became -1232.16. How did you read this? Are these monthly closes? Or changes? Or …

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