Sharpe and Fama

Expected return can be defined as follows: Consequently, in order to raise the long-term rate of return, it is simply necessary to increase the beta, considered as a new measure of risk. Besides the difficulty of measuring it with precision, the beta changes constantly, solely in relation to market fluctuations. Furthermore, use of beta assumes that the upside potential and downside risk are equal, although this is not necessarily the case in practice.It was demonstrated in 1992 by Fama and French10 that there is no relation between securities' return and their beta, which does not therefore seem to be a decisive factor. Ratios such as the Price to Earnings Ratio (P/E) or the Price to Book were much more effective in explaining differences in returns between securities. These results were confirmed in a study by Malkiel a few years later.11 Furthermore, “recurring anomalies between expected and actual returns, attributed to pockets of market inefficiency, are demonstrated by various empirical studies”. Thus, he identified that with an equal beta, the shares of small capitalisation companies got an average return significantly higher than large-cap stocks. Similarly, “growth companies' stock (low book-to-market ratio), for the same beta, got a lower return than value companies' stock (high book-to-market ratio)”.12 Certain risk factors are therefore not completely taken into account by the beta. It would seem that beta is not an adequate measure of risk, as other elements influence market risk; it depends on a large number of macroeconomic variables, such as interest rates, inflation, changes in GDP, etc. Other than the difficulty of selecting an index that can be regarded as representative of the market, the market rate of return is difficult to estimate and it is an ex ante return. At this stage, is it also worth noting that the CAPM is often used to determine the cost of equity, one of the components of a company's cost of capital. This is the rate of return required by shareholders, but it is difficult to estimate in practice.
I believe that investors should focus on the factors that influence price fluctuations and try to determine the forces that cause prices to rise or fall. Therefore, the sole criterion of volatility or reactivity in relation to the market is too simplistic as a measure of risk.