A Complete Analysis of Low β Factor in Portfolio Construction Empirical Results and New Explanation. Methods and Models for Financial Engineering

This work aims to insight the β factor and the related components, in order to build a profitable strategy and, more important, for provide empirical evidences about the beta anomaly. The thesis analyze the beta anomaly, following the fundamental steps from the born to the evolution. From the empirical evidences of this anomaly, we starts for provide a new investment approach and, consequently, we provide an explanation about the nature of the low beta strategies. The anomaly, born ten year after the modern finance, is the low beta stock over-performance with respect to the high beta stocks. The historical analysis performed by several researchers, demonstrates that the CAPM is fallacious, noting a bias about the risk/reward relationship. As a conse- quence, in 1972, Eugene Fama refers about the "Death of the Capital Asset Pricing Model". With this work we want to underline several points, one consequence of the other. Overall we support the beta anomaly, and we exploit this framework for build a profitable strategy capable to over-perform the reference index with a low volatility feature. But this work is more ambitious, starting from the second step we can understand why. We start from the main beta components, Correlation and Standard deviation, thanks to econometric tools. After we begin our top-down anal- ysis, going deeply into the market dividing it by the main sectors. This granularity, is the red-line across all the work because will be reproduced for each analysis. In fact, we will able to check, graphically and numerically, the beta dispersion within sectors and years, in other words we will check how the risk level across the market and across the sectors changes. At the end, we will focus on the most important topic of our work, a misunderstanding still present in the literature. The final aim of this work is to provide evidence about the effective existence of the beta anomaly strategy. Splitting the CAPM beta into the main component, we will able to answer to this question and to provide an important improvement to the modern financial theory.