How Should Beta Influence Investment Decisions?

Abstract

In the highly competitive field of finance, investors are constantly trying to invest in stocks and other assets to outperform their peers and various benchmarks. At the center of modern portfolio theory is beta, a necessary component to calculate a stock's expected return and the subject of debate within academia. This paper strives to demonstrate that beta is somewhat when making investment decisions and that while investors should look elsewhere for more relevant factors to make investment decisions, beta can be useful in estimating a stock's risk. This paper will also analyze both the practitioner and academic uses of beta and how theoretical uses of beta have evolved over time as well as calculate beta's predictive ability.