Given this relatively small outperformance during good times and vast underperformance during weak periods, it is easy to see why we prefer low Beta stocks. Therefore, if the market returned 10% in a year, high Beta names would, on average, produce 13.8% returns. However, during down years, high Beta names capture 243% of the market’s returns.
The company was founded in 1957, should produce about $3 billion in revenue this year, and trades with a market cap of $2.8 billion. These two numbers – 12% and 6%, respectively – are the numerator and denominator for the Beta formula. Twelve divided by six yields a value of 2.00, and that is the Beta for this hypothetical security. In a similar example, if the market lost 10% during a year, the group of high Beta names would have returned -24.3%.
It essentially measures the relative risk exposure of holding a particular stock or sector in relation to the market. The value of any stock index, such as the Standard & Poor’s 500 Index, moves up and down constantly. At the end of the trading day, we conclude that “the markets” were up or down. An investor considering buying a particular stock may want to know whether that stock moves up and down just as sharply as stocks in general. It may be inclined to hold its value on a bad day or get stuck in a rut when most stocks are rising.
Evaluating Market Beta
In fact, its business may pick up when a poor economy leads consumers to seek ways to economize. Beta particles are fast-moving electrons with a very low mass and so have a high charge to mass density. They are deflected much more than the heavier alpha particles due to this charge to mass density. Beta particles (β) are small, fast-moving particles with a negative electrical charge that are emitted from an atom’s nucleus during radioactive decay. These particles are emitted by certain unstable atoms such as hydrogen-3 (tritium), carbon-14 and strontium-90. Note that some stocks may or may not be in the S&P 500 index, but the other examples are not.
This means that they’re prescribed for conditions other than the ones they’re specifically approved to treat. Because beta-receptors are found in several locations throughout the body, beta-blockers can treat a wide range of problems and conditions. Beta receptors come in three different sub-types and have different functions depending on their location. This portfolio would have a beta of -0.037, which would be considered a near-zero beta portfolio. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.
A stock with a beta value of 1 will see its price move with that of the index. This can be achieved by obtaining other stocks that have negative or low betas, or by using derivatives to limit downside losses. Diversification cannot help an investor to smooth out systematic risk, given that it affects all or most industries. The economic downturn affected the market as a whole and brought down the prices of most individual stocks.
- These estimators attempt to uncover the instant prevailing market-beta.
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- Thus insured, movements of the overall stock market no longer influence the combined position on average.
- The result, expressed as a number, shows the security’s tendency to move with the benchmark.
The company has been at the epicenter of the nearly unprecedented egg price inflation that has occurred in recent months, causing a spike in not only revenue, but earnings for fiscal 2023. As we can see, Cal-Maine is the top producer of shell eggs in the US, and has one-fifth of the retail market. That means it has been an enormous beneficiary of egg price inflation, and that is expected to drive record revenue and earnings for fiscal 2023, which ends in May. Our second stock is Cal-Maine Foods, a specialty food company that produces, grades, packages, markets, and distributes shell eggs. The company offers a variety of eggs, including nutritionally enhanced, cage free, organic, and brown eggs under various brands.
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Therefore, if a stock always falls 10% while the market is rising 10% a company would have a negative beta of 1 because it falls by the same amount that the market rises. A β of less than 1 indicates that the security is less volatile than the market as a whole. Similarly, a β of more than 1 indicates that the security is more volatile than the market as a whole.
Finance
In order to make sure that a specific stock is being compared to the right benchmark, it should have a high R-squared value in relation to the benchmark. R-squared is a statistical measure that shows the percentage of a security’s historical price movements that can be explained by movements in the benchmark index. When using beta to determine the degree of systematic risk, a security with a high R-squared value, in relation to its benchmark, could indicate a more relevant benchmark. Beta (β) is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole (usually the S&P 500). Stocks with betas higher than 1.0 can be interpreted as more volatile than the S&P 500. Systematic risk is the type of risk that is caused by factors beyond a company’s control.
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There seems to be something about the securitization process that makes real assets behave more like financial assets. Beta measures a stock’s volatility, the degree to which its price fluctuates in relation to the overall stock market. In other words, it gives a sense of the stock’s risk compared to that of the greater market’s. Beta is used also to compare a stock’s market risk to that of other stocks. Investors with low tolerance for volatility would be happy with a stock that has a beta value of 1 or lower.
The Implications of Negative Beta
It is obtained as the slope of the fitted line from the linear least-squares estimator. The OLS regression can be estimated on 1–5 years worth of daily, weekly or monthly stock returns. Essentially, beta expresses the trade-off between minimizing risk and maximizing https://1investing.in/ return. On the other hand, if the market declines 6%, investors in that company can expect a loss of 12%. A negative beta just means there is a negative covariance (and thus correlation) between your asset in question and your reference “market” portfolio.
Investors who are willing to take on more risk may want to invest in stocks with higher betas. Thus, negative beta decay results in a daughter nucleus, the proton number (atomic number) of which is one more than its parent but the mass number (total number of neutrons and protons) of which is the same. For example, hydrogen-3 (atomic number 1, mass number 3) decays to helium-3 (atomic number 2, mass number 3). False, betas are usually positive which is indicative of an asset which is highly correlated with the market.
This would be an example of a very high Beta stock and would offer a significantly higher risk profile than an average or low Beta stock. Beta of 1.00 means that the security in question should move virtually in lockstep with the benchmark (as discussed briefly in the introduction of this article). Evidence suggests that during good years for the market, high Beta names capture 138% of the market’s total returns. This is beneficial for investors for obvious reasons, particularly those that are close to or already in retirement, as drawdowns should be relatively limited against the benchmark.
How to Use Beta for Investing
WD-40 finds itself with a beta value of -0.19 against the S&P 500, which is the lowest value in the index. That means the stock is not only attractive on a dividend growth basis, but it trades inversely to the index itself, providing some measure of diversification for investors’ portfolios. This security would theoretically achieve stronger returns to the upside but certainly much larger losses on the downside, highlighting the risk of high Beta names during anything but strong bull markets.
