Analysis of Equity β Principal Components in Low Risk Framework: New Results and Prospectives

Abstract

With our work we want to exploit the so called anomaly regarding the risk-reward relationship. Starting from the some evidences that so called Low Beta strategies generate, we decompose the formula in principal factors in order to asses the different drivers and contributions. Identifying Correlation and Standard Deviation as principal components we run an extensive analysis focusing on S&P 500 Index and relative members, covering the last 10 years. Based on that we assess the impact on the overall beta with Ordinary Least Square regression, performing also some portfolios backtests. We play basically 2 Long/Short strategies, ranking the stocks with correlation and with standard deviation, facing the results with other based on ranking. We extend our research looking in the different Sectors and finally we develop a new ideas in order to show the beta evolution respect market and reference sector, Walking Beta. In the second paper we will extend our research, including a new application of the options combined with the high/low beta intuition.