Behavioral Heterogeneity in the CAPM with an Application to the Low-Beta Anomaly

This note extends the CAPM to situations where a subset of investors is not mean-variance optimizers. We show that a CAPM relation holds when suitably adjusting beta to the presence of such investors. The adjusted CAPM can be used to reveal which non-mean-variance behavior is needed to explain so-called CAPM anomalies. For example, the adjusted CAPM explains the low-beta anomaly if non-mean-variance investors overweight (underweight) high-beta (low-beta) assets. Our empirical analysis reveals that one needs two thirds of investors to depart from mean-variance analysis in order to explain the low beta anomaly