Risk & The Two Faces Of Beta
There’s a growing body of evidence that beta is actually a two-sided, not a one-sided, “coin,” and those two faces are separated by perceptions of risk.
Being risk averse, most investors care more than just about the standard deviation of returns (volatility), assigning more weight to downside deviations from the mean than to upside deviations. They also care about when that volatility appears.
Thus, assets that do poorly in bad times, such as in recessions when labor capital risk increases, should carry large risk premiums. In other words, that’s a risk-based explanation for the value premium, as well as the momentum premium. And that’s what the research is showing.
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