Abstract
In four large online experiments, we study how investors assess the relationship between stock portfolios and the market. Participants select or are randomly assigned a portfolio of stocks from a market index. They state portfolio return expectations conditional on different market outcomes, revealing implied beliefs about portfolio beta. We find general underestimation of beta which is stronger for downside beta. This asymmetry is amplified for participants who select their portfolio. They believe their portfolio goes up with the market but does not come down with it. We confirm biased beliefs about beta with financial professionals, monetary incentives, and alternative belief elicitation methods.
| Original language | English |
|---|---|
| Article number | rfaf028 |
| Pages (from-to) | 1397-1436 |
| Number of pages | 40 |
| Journal | Review of Finance |
| Volume | 29 |
| Issue number | 5 |
| Early online date | 12 Jul 2025 |
| DOIs | |
| Publication status | Published - 1 Sept 2025 |
| MoE publication type | A1 Journal article-refereed |
Funding
Support from the Aarhus Universitets Forskningsfond (grant no. AUFF-E-2019-7-20), the Danish Finance Institute (DFI), and the Foundation for the Advancement of Finnish Securities Markets is gratefully acknowledged.
Keywords
- Beta
- Diversification
- G11
- G12
- G41
- Overconfidence
- Return expectations
- Risk expectations
- risk expectations
- return expectations
- overconfidence
- diversification
- beta
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