ESTIMATES OF SMALL-STOCK-BETAS ARE MUCH TOO LOW - ADJUSTED ESTIMATES OF BETA ARE POSITIVELY RELATED TO FUTURE COMMON-STOCK RETURNS

The authors adjust estimates of systematic risk, betas, for cross-auto correlations in security returns. They show that substantial positive adjustments to beta are necessary for small firms. Traditional estimat es of beta are unrelated to future returns over the 1931 through 1994 time period, while adjusted estimates are positively correlated with f uture returns. In addition, adjusted beta estimates partially account for the size effect in common stock returns.