How to Outperform S&P 500 Index?

How to outperform S&P 500 index?

To outperform the S&P 500 one should take into consideration that he/she should choose the stocks with the highest beta in comparison to the index beta, with the index beta equaling to one. According to CAPM and Arbitrage Pricing Theory, it should be easy to beat the S&P 500. Because expected return should be proportional to risk, all one needs to do is hold a portfolio that is riskier than the S&P 500. However, some sources state that low beta stocks could outperform the S&P

One alternative to outperform the S&P is the strategy of managing a portfolio’s beta, a measure of how a portfolio tends to respond to movements in the S&P 500 Index. Stocks with values of beta less than 1.0 tend to react less to changes in the broader market. (For example, utility stocks typically have betas less than 1.0, because their earnings are largely independent of broader market volatility.) Where as stocks with values of beta higher than 1.0 tend to react more to changes in the broader market. Low beta stocks tend to have lower volatility than the market as a whole, where as High beta stocks tend to have higher volatility than the market as a whole; however, the terms “low-beta” and “low-volatility” are not entirely similar.

If we believe that markets are efficient, and that the return from a stock portfolio is determined by the amount of risk (or volatility) in the portfolio, then it would not make a sense for investors to invest in a portfolio of low volatility/low beta stocks. Investors should be investing in a portfolio of high volatility/high beta stocks. However, there is considerable evidence that low beta stocks tend to outperform. Low beta strategies can provide risk-averse investors with a way to maintain some of the upside potential from equities, while managing overall portfolio risk.

In articles, when researched about the risk return relationship. It was explored that the risk return relationship that suggested the traditional views...