Why Some Anomalies Persist

The academic literature is filled with challenges to the efficient markets hypothesis. Perhaps the greatest among these challenges involves the existence of momentum and the poor performance of small-growth stocks and high-beta stocks.

Beta is defined as the measure of the systematic risk of a security or a portfolio in comparison to the market as a whole. It’s highly correlated with another measure of risk—volatility.

Among the behavioral explanations for these two anomalies are that investors aren’t perfectly rational, that they don’t learn or change their behavior, and that there are some with a preference for assets with lotterylike distributions.

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