Beta and the Capital Asset Pricing Model: Inspiring Innovation in Portfolio Management

by: James Picerno

Beta never really died, as many have proclaimed over the years. In fact, beta's never been more influential.

As yours truly detailed in the November issue of Wealth Manager, beta's very much alive, and kicking. What's more, beta's at the heart of a number of cutting-edge portfolio applications in the 21st century.

Beta, of course, is a risk measure that's pivotal in the Capital Asset Pricing Model, which lays much of the foundation for indexing. Although CAPM is more than 40 years old, this durable theory continues to inspire innovation in portfolio management.

CAPM isn't perfect, of course. The world is a complicated place, and no one theory can capture all the nuances that collectively define the global capital markets. Yet CAPM does a pretty good job of delivering the goods when its lessons are translated into indexing. Meanwhile, creative minds in finance keep trying to improve CAPM as a tool for the real world. Witness the ongoing love affair with ETFs, which speak volumes about the market's enduring embrace of beta. But ETFs are just the tip of the iceberg in the evolving story that is beta.

For a closer look at why you should care, read on