Beta Coefficients as Predictors of Return

Two major controversies have arisen regarding beta coefficients. First, are they useful in the retrospective measurement of investment performance? Second, can they be employed for purposes of stock selection? This paper is concerned with the latter of these two issues. More specifically, we shall seek to determine if there is any correlation between historical beta coefficients and future stock performance. Will portfolios with high historical betas outperform the averages over an ensuing market advance? Will portfolios with low historical betas successfully resist a market setback? In the sections that follow, we will: 1) briefly review the computation and interpretation of betas; 2) examine the distribution of beta coefficients for each year over the 1961-1970 decade; 3) determine if betas for each year are good predictors of return for the succeeding year; and 4) determine if betas immediately prior to primary bull (bear) markets are reliable indicators of prospective stock performance over the coming advance (decline).