A bank sponsor turned a CAPM anomaly into a leveraged low-beta investment strategy

Evidence

Wells Fargo Bank supported Black, Jensen, and Scholes’s research financially and sponsored the conference at which it was first presented, held at the University of Rochester (where Jensen then taught) in August 1969. Probably at Black’s suggestion, McQuown’s group at Wells Fargo saw a way to exploit the result of the research. If the anomalous finding was the result of restrictions on borrowing, perhaps it could be exploited by an investment company, which could borrow more easily and more cheaply than an individual could? The idea was to invest in low-beta stocks, with what the study by Black, Jensen, and Scholes had suggested was their high return relative to risk, and to use “leverage” (in other words, borrowing) to increase the portfolio’s level of risk to somewhat more than the risk of simply holding the overall market, so also magnifying returns (McQuown interview). — Donald MacKenzie, An Engine, Not a Camera, 395

Categorization

• XREF: This is a textbook example of the performativity thesis’s precursor stage — the model’s anomaly being converted into a tradable strategy by the model’s own financial sponsor. Links directly to the book’s central argument about models shaping markets. — connects to: CAPM promised a simple tradeoff hidden beneath Wall Street’s apparent complexity — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 255; Fama attributed anomalies to CAPM flaws, not market inefficiency. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 430; Trading on a CAPM anomaly would have performed it away by bidding up prices — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 397 (+1 more)
• SEED: The Wells Fargo example is a clean case for an article on how empirical anomalies become exploitable investment products — the theory-to-practice pipeline as arbitrage opportunity.
• ADDENDUM: Parallel to the graft/tree infrastructure article’s theme: a theoretical finding repurposed as a practical engineering move, here financial leverage applied to an academic result.

Broader Connections

• Trading on a CAPM anomaly would have performed it away by bidding up prices #qualifies (0.80) — Donald MacKenzie, An Engine, Not a Camera, 397
• Anomaly-based funds profit by making markets rather than trading as customers #responds-to (0.75) — Donald MacKenzie, An Engine, Not a Camera, 443