Market Beta Matters
Authors:
- James W. KolariJames W. Kolari
- Yao HanYHYao Han
- Wei LiuWLWei Liu
Preprint
- 11 February 2026
- preprint
- Published by Elsevier in SSRN Electronic Journal
Abstract
We empirically construct beta-sorted portfolios that are relatively efficient for testing the CAPM. Our novel approach applies the well-known Gibbons, Ross, and Shanken (1989) test for zero joint alphas to iteratively construct these portfolios. Unlike traditional tests using inefficient portfolios, crosssectional regression tests of market factor loadings produce significant market prices of beta risk. Consistent with CAPM theory, average portfolio returns are positively related to both beta risk and total risk. Further tests show that average mispricing errors are substantially reduced using efficient portfolios.Keywords
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