Low-beta stocks earn higher risk-adjusted returns than high-beta stocks.
Black, Jensen & Scholes; Frazzini & Pedersen · Journal of Financial Economics · published 1972 · original sample 1926–2012 (reported ≈ +7.0%/yr, t ≈ 3.8)
Growth of $1 in the long-short strategy, gross of trading and shorting costs. The dashed line marks the year the paper was published — everything to its right is out-of-sample.
$1 in the long-short strategy, gross of costs. Grey = the sample the paper had; blue = everything since.
The comparison the site is built around.
| Window | Return/yr | Vol | Sharpe | t-stat | Max DD |
|---|---|---|---|---|---|
| Paper's sample (1926–2012) | -4.1% | 22.9% | -0.07 | −0.4 | -88% |
| After publication (1973–2026) | -4.7% | 25.5% | -0.06 | −0.4 | -96% |
| Full sample (1963–2026) | -4.9% | 24.8% | -0.08 | −0.6 | -96% |
Is there a risk-adjusted alpha left once you control for the standard factors? Alpha is annualized; t-stats use Newey–West standard errors.
| Model | Alpha/yr | Alpha t | R² | Biggest loadings |
|---|---|---|---|---|
| CAPM (market only) | +5.4% | 2.2 | 0.40 | Mkt-RF -1.01 |
| Fama–French 3-factor | +4.0% | 2.0 | 0.59 | SMB -1.01, Mkt-RF -0.75, HML +0.52 |
| Fama–French 5-factor | +0.1% | 0.0 | 0.65 | SMB -0.85, CMA +0.78, Mkt-RF -0.65 |
| FF5 + momentum | -1.8% | −0.9 | 0.66 | SMB -0.85, CMA +0.72, Mkt-RF -0.61 |
Trailing 3-year Sharpe ratio. Long stretches below zero are common.
| 1960s | -12.6%/yr | Sharpe -0.72 |
| 1970s | +1.6%/yr | Sharpe 0.07 |
| 1980s | +8.5%/yr | Sharpe 0.42 |
| 1990s | -11.3%/yr | Sharpe -0.59 |
| 2000s | +4.2%/yr | Sharpe 0.14 |
| 2010s | -1.1%/yr | Sharpe -0.05 |
| 2020s | -8.3%/yr | Sharpe -0.21 |
Not a risk premium — the opposite. It exists because many investors can't use leverage, so they overpay for high-beta stocks to reach their return target, depressing those stocks' returns.
A 'lottery preference': some investors like the small chance of a huge payoff from a volatile stock and will pay up for it.
The formal BAB factor is post-2014, but the low-beta effect was documented in 1972 and has been remarkably persistent. Critics (Novy-Marx & Velikov) argue the AQR construction leans on tiny illiquid stocks.
Long-short = top-decile minus bottom-decile of stocks univariately sorted on the characteristic. Value-weighted, US equities, monthly, gross of transaction and shorting costs. The original-paper figures are approximate and annualized for comparison.