In equilibrium, securities with higher betas yield higher expected returns.

Evidence

In equilibrium, securities prices would be such that there would be a simple straight-line relationship between the expected return on a security and the extent of its covariation with the posited underlying factor. “Following the conventions” of the standard statistical technique of regression analysis, Sharpe used the Greek letter (3 (beta) to designate the extent of the sensitivity of the returns on a stock or other security to changes in the underlying factor. “Thus the result could be succinctly stated: securities with higher betas will have higher expected returns.” (Sharpe 1995, p. 218) The logic of the diversification of investment portfolios gave an intuitive explanation of the dependence of expected return on beta. — Donald MacKenzie, An Engine, Not a Camera, 237

Categorization

• DEFINE: Defines beta: sensitivity of a security’s returns to changes in an underlying factor, via the convention of regression analysis.
• XREF: Beta as a risk measure connects to standard finance texts and to the broader financialization literature on CAPM’s central role. — connects to: An asset’s expected return rises in a straight line with its market beta — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 254; Investors who take bigger risks receive proportionally larger returns. — Nicolas Baumard, A mutualistic approach to morality: The…, 151; CAPM states expected return is linear in beta against an optimal portfolio. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 240 (+1 more)

Broader Connections

• An asset’s expected return rises in a straight line with its market beta #corroborates (1.00) — Donald MacKenzie, An Engine, Not a Camera, 254
• CAPM states expected return is linear in beta against an optimal portfolio. #qualifies (0.85) — Donald MacKenzie, An Engine, Not a Camera, 240
• Beta measures non-diversifiable systematic risk, which sets relative asset prices #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 253
• Investors who take bigger risks receive proportionally larger returns. #expands (0.75) — Nicolas Baumard, A mutualistic approach to morality, 151