Roll is from the Anderson School of Management, University of California, Los Angeles, and Ross is from the Yale School of Management, Yale University. We are grateful for comments from T. Daniel Coggin, Mark Grinblatt, John E. Hunter, Chi-Cheng Hsia, Andrew Lo, Simon Wheatley, three referees, the coeditor of the Journal, David Mayers, and the editor, René Stulz.
On the Cross-sectional Relation between Expected Returns and Betas
Article first published online: 30 APR 2012
1994 The American Finance Association
The Journal of Finance
Volume 49, Issue 1, pages 101–121, March 1994
How to Cite
ROLL, R. and ROSS, S. A. (1994), On the Cross-sectional Relation between Expected Returns and Betas. The Journal of Finance, 49: 101–121. doi: 10.1111/j.1540-6261.1994.tb04422.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
There is an exact linear relation between expected returns and true “betas” when the market portfolio is on the ex ante mean-variance efficient frontier, but empirical research has found little relation between sample mean returns and estimated betas. A possible explanation is that market portfolio proxies are mean-variance inefficient. We categorize proxies that produce particular relations between expected returns and true betas. For the special case of a zero relation, a market portfolio proxy must lie inside the efficient frontier, but it may be close to the frontier.