A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

RISK AND RETURN ACCORDING
TO THE CAPITAL-ASSET PRICING

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MODEL
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ILLUSTRATION OF PORTFOLIO BUILDING
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Just as stocks had their fads, so beta came into high
fashion in the early 1970s. 
Institutional Investor
, the
prestigious magazine that spent most of its pages chronicling
the accomplishments of professional money managers, put its
imprimatur on the movement by featuring on its cover the
letter beta on top of a temple and including as its lead story
“The Beta Cult! The New Way to Measure Risk.” The
magazine noted that money men whose mathematics hardly
went beyond long division were now “tossing betas around
with the abandon of PhDs in statistical theory.” Even the
SEC gave beta its approval as a risk measure in its
Institutional Investors Study Report
.
On Wall Street, the early beta fans boasted that they could

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earn higher long-run rates of return simply by buying a few
high-beta stocks. Those who thought they were able to time
the market thought they had an even better idea. They would
buy high-beta stocks when they thought the market was
going up, switching to low-beta ones when they feared the
market might decline. To accommodate the enthusiasm for
this new investment idea, beta measurement services
proliferated among brokers, and it was a symbol of
progressiveness for an investment house to provide its own
beta estimates. Today, you can obtain beta estimates from
brokers such as Merrill Lynch and investment advisory
services such as Value Line and Morningstar. The beta
boosters on the Street oversold their product with an abandon
that would have shocked even the most enthusiastic academic
scribblers intent on spreading the beta gospel.