A concave security market line

Enrico G. De Giorgi, Thierry Post, Atakan Yalçın

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)


We provide theoretical and empirical arguments in favor of a diminishing marginal premium for market risk. In capital market equilibrium with binding portfolio restrictions, investors with different risk aversion levels generally hold different sets of risky securities. Whereas the traditional linear relation breaks down, equilibrium can be described or approximated by a concave relation between expected return and market beta, and a concave relationship between market alpha and market beta. An empirical analysis of U.S. stock market data confirms the existence of a significant concave cross-sectional relation between average return and estimated market beta. We estimate that the market risk premium is at least four to six percent per annum, substantially above traditional estimates. A practical implication for active portfolio managers is that the alpha of “betting against beta” strategies seems dominated by the medium-minus-high-beta spread rather than the low-minus-medium-beta spread. The success of such strategies thus largely depends on underweighting or short selling high-beta stocks.

Original languageEnglish
Pages (from-to)65-81
Number of pages17
JournalJournal of Banking and Finance
Publication statusPublished - Sept 2019


  • Asset pricing
  • Capital market equilibrium
  • Investment restrictions
  • Market beta
  • Portfolio theory
  • Stock selection

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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