Why the low returns to beta and other forms of risk

High-beta stocks typically fail to outperform low-beta stocks. Investors ha ve heterogeneous opinions about value, and the difference between the retur n expected by the marginal investor and by the typical investor increases w ith the divergence of opinion. The author suggests that the divergence of o pinion diminishes following an initial public offering, producing long-run underperformance of such offerings.. Because divergence of opinion, uncerta inty, and beta risk are correlated, according to the author, this causes an uncertainty-induced bias that increases with beta, producing a relatively aat security market line, natter than the risk-return relationship anticipa ted by the typical investor. An implication of this theory is that investor s can improve their return relative to risk by exploiting the flatness of t he security market line.