Bigger Beta is not always Better: A Study of Low-Beta Strategies

Abstract: This paper tests to what extent it is possible by an individual investor to implement a low-beta strategy, using 78 MSCI indices of countries and industries with a naive diversification (equal-weighting). Five different strategies with three rebalancing windows are built, implementing a simple ranking method. The results suggest that it is possible to implement a low-beta strategy with a naive portfolio construction, thus offering positive total mean returns and Sharpe ratios with lower standard deviations than the benchmark index. The strategy has a negative relationship with the market index and can be used as a hedging strategy for investors. Our empirical evidence shows that the Country portfolios performs better, with a higher alpha, than the Industry portfolios. We test the attributions and find that the BAB factor positively explains performances, whereas the F-F Three-factor model results in mixed attributions. Behavioural explanations seem to be plausible to describe the excess demands of high-beta assets.