The 1980’s were a critical era for gauging the capital asset pricing model’s—or CAPM’s—validity, posits a post on the CFA Institute Blog. Greater data access and expanded computing power in that era allowed analysts to explore beta’s effectiveness in predicting future returns after the model was developed in the 60’s and 70’s.
But during the 80s decade, the general consensus was that beta’s forecasting power wasn’t great. The authors of the post wanted to know how well has beta anticipated returns in the 40 years since? They analyzed every firm that has traded on the NYSE and NASDAQ, separating firms into low beta (under 0.5) and high beta (greater than 1.5) portfolios.
While the 80s were a terrible time for beta—predicting accurately only 4 out of the 10 years—the decades since have proved beta to be a better predictor. In every decade from 1990-2020, a high beta portfolio generated more than a 5-percentage point premium annually over its low beta peer. And from 2010-2020, CAPM was correct 10 out of 11 years. Leaving the 80s behind, the article concludes, CAPM and beta has been a pretty good forecaster of future returns.