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On the Cross-Sectional Relation between Expected Returns and Betas

Richard Roll and Stephen A. Ross
The Journal of Finance
Vol. 49, No. 1 (Mar., 1994), pp. 101-121
Published by: Wiley for the American Finance Association
DOI: 10.2307/2329137
Stable URL: http://www.jstor.org/stable/2329137
Page Count: 21
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On the Cross-Sectional Relation between Expected Returns and Betas
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Abstract

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.

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