An Explanation for Beta's Mean-reversion

Abstract

This study aims to improve upon the CAPM by showing that the beta risk value of a stock is mean reverting and this mean reverting tendency is caused by firms' growth. Ninety stocks categorized into three sets (small non-growth which start and end the period small, small growth which start the period small and end large, and large which start and end the period large) are examined over the time period 1992 to 2012. The mean reverting trend will be shown to occur in the small growth stocks while the small non-growth stocks' betas will be far removed from the market average of one and the large companies will be very close to one. Preliminary results have confirmed that small non-growth stocks have means' far from one and that large stocks have means that are very nearly one.