Estimates of Small Stock Betas are Much Too Low

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 estimates of beta are unrelated to future returns over the 1931 through 1994 time period, whereas adjusted estimates are positively correlated with future returns. In addition, adjusted beta estimates partially account for the size effect in common stock returns.