In Kaplan book 4 page 135,
One reason the ex post beta was not as expected:
“The performance of the portfolio and/or index may have been different from their ex ante betas. Given that the portfolio and contract increased by the same percent amount, they acted as if their betas were the same and did not reflect the initial estimates of beta.”
What does this two sentences mean?
They mean that, predictions notwithstanding, if two portfolios produced the same results, they ended up having the same beta value.
By the way, that’s not true. But it’s an excellent example of how people completely misunderstand what beta represents. It would be interesting to look through the curriculum to see if the author there made the same blunder.
Thank you for the help like always, Magician!
You’re welcome.
I’d imagine two securities can have the same result and different betas, or vice versa. Beta can be such a bad predictor of returns. It’s just a least squares regression slope line. Can have terrible explanatory power at times. But I’m only a candidate like most, I’ve been wrong many times before lol. I always just visualize the beta regression line with all the actual returns on a scatter plot all around it. Saw it back in like level I.
I think all it means is that ex-post beta estimation will not necessarily hold true ex-ante. I think the sentence means that since both investments produced the same return, they acted as if the beta was the same. I don’t think they are implying that the beta should be actually considered to be the same based on a single point estimate of returns.
Single factor CAPM prediction can only produce the same estimate of return for 2 securities if their the estimated betas in the model are equal (assuming same reference RFR).
I’m sure that that’s what the author of that sentence meant.
And my point is that if that’s what the author meant, then the author harbors a fundamental misunderstanding of what beta means. It absolutely does not mean that two securities with the same beta will have identical returns. They can have returns that aren’t remotely similar (e.g., one can be −50% while the other is +60%).
It’s irritating that candidates get this kind of garbage from sources that are supposed to be helping them learn things correctly.
I feel like the CFAI curriculum clearly has an interest in you correctly learning the material. Versus Schweser only wants you to pass and not necessarily “learn” the content correctly. Candidates pay them for a passing score and that’s what they care about.