Investor Betas

29 Pages Posted: 28 Jan 2021

See all articles by Ryan Lewis

Ryan Lewis

University of Colorado, Boulder

Shrihari Santosh

University of Colorado at Boulder - Department of Finance

Date Written: November 1, 2020


Investors’ return on their portfolios, as proxied by the market, is a theoretically appealing but empirically unsuccessful asset pricing factor. In practice, many institutional investors choose to deviate substantially from the market portfolio. We propose a simple model in the spirit of Merton (1987) which implies that an asset’s expected return is linear in its average idiosyncratic beta with respect to each active investor’s portfolio return. We estimate this relation using 13F holdings data for active investors and find that a unit increase in investor betas commands 5-10% greater annual expected return. The results are robust to alternative ways of estimating betas and using daily or monthly returns. In sum, investors appear to be compensated for holding stocks that have a high covariance with the idiosyncratic component of their portfolio.

Keywords: CAPM, risk, return, idiosyncratic, portfolio, active investor

JEL Classification: G11, G12

Suggested Citation

Lewis, Ryan and Santosh, Shrihari, Investor Betas (November 1, 2020). Available at SSRN: or

Ryan Lewis

University of Colorado, Boulder ( email )

Boulder, CO 80309-0419
United States

Shrihari Santosh (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

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