The conditional relationship between beta and returns: Recent evidence from international stock markets

The risk-return relationship is one of the fundamental concepts in finance that is most important to investors and portfolio managers. Finance theory argues that the beta or systematic risk is the only relevant risk measure for investors. However, many studies have showed that betas and returns are not related empirically, no matter in domestic markets or in international stock markets. This paper examines the conditional relationship between beta and returns in international stock markets for the period from January 1991 to December 2000. After recognizing the fact that while expected returns are always positive, realized returns could be positive or negative, we find a significant positive relationship between beta and returns in up market periods (positive market excess returns) but a significant negative relationship in down market periods (negative market excess returns). The results are robust for both monthly and weekly returns and for two different proxies of the world market portfolio. Our findings indicate that beta is still a useful risk measure for portfolio managers in making optimal investment decisions.