Restricting riskless borrowing explains the empirically observed low-beta anomaly

Evidence

Black experimented with the theoretical consequences of dropping the assumption of unrestricted borrowing. He found that he could explain the pattern of stock returns identified in his work with Jensen and Scholes by “an equilibrium in which borrowing at the riskless rate is either fully or partially restricted” (Black 1972, p. 454). — Donald MacKenzie, An Engine, Not a Camera, 394

Categorization

• DEFINE: Clarifies how Black’s version of the CAPM works: dropping Sharpe’s unrestricted-borrowing assumption is the key theoretical move.
• XREF: connects to: CAPM states expected return is linear in beta against an optimal portfolio. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 240; Levered low-beta portfolios risk instability when group earnings deviate from expectations — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1488

Broader Connections

• Levered low-beta portfolios risk instability when group earnings deviate from expectations #qualifies (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1488