Ergodicity Economics and the High Beta Conundrum

Abstract

Using Ergodicity Economics this paper shows that terminal wealth maximizing portfolios have betas that are substantially higher than the market portfolio (beta = 1). Simulations indicate that uncertainty about the future distribution of returns and the high cost of over-betting could be limiting factors to implementing such high beta portfolios. Another possibility is that investors do care about risk and are trying to maximize some form of risk adjusted growth rate.