Using and Misusing the Beta Ratio
By Ken Little, About.com
Do you know your stocks’ beta?
If you do, what does it mean and should you be concerned?
Beta is one of the most used and misused of the financial ratios. First off,
let’s review what a beta is, then look at how you can use it in a meaningful
way.
The beta is a measure of a stock’s price volatility in relation to the rest
of the market. In other words, how does the stock’s price move relative to the
overall market.
Beta CalculatedThe number is calculated for you (thank goodness) using
regression analysis. The whole market, which for this purpose is considered the
S&P 500, is assigned a beta of 1. There is no single index used to
calculate beta, although the S&P 500 is probably the most common proxy for
the market as a whole.
Stocks that have a beta greater than 1 have greater price volatility than
the overall market and are more risky.
Stocks with a beta of 1 fluctuate in price at the same rate as the market.
Stocks with a beta of less than 1 have less price volatility than the market
and are less risky.
Beta and Risk
Of course, there is more to it than that. Risk also implies
return. Stocks with a high beta should have a higher return than the market. If
you are accepting more risk, you should expect more reward.
For example, if the market with a beta of 1 is expected to return 8%, a
stock with a beta of 1.5 should return 12%. If you don’t see that level of
return, then the stock is not a good investment possibility.
Stocks with a beta below 1 may be a safer investment (at least by this one
measure) and you should expect a lower return.
Beta seems to be a great way to measure the risk of any stock. If you look a
young, technology stocks, they will always carry high betas. Many utilities on
the other hand, carry betas below 1.
Finding Betas
You can also compare a stock’s beta to its sector to get a
picture of whether the stock is out of line with its peers.
You can find a stock’s beta through a number of online services such as
offered by Reuters.
You have to register (it’s free) to get to the level of detail where you can
find a stock’s beta among the listed ratios.
Problems with Beta
While the may seem to be a good measure of risk, there are
some problems with relying on beta scores alone for determining the risk of an
investment.
- Beta looks backward and
history is not always an accurate predictor of the future.
- Beta also doesn’t account for
changes that are in the works, such as new lines of business or industry
shifts.
- Beta suggests a stock’s price
volatility relative to the whole market, but that volatility can be upward
as well as downward movement. In a sustained advancing market, a stock
that is outperforming the whole market would have a beta greater than 1.
How to Use Beta
Investors can find the best use of the beta ratio in
short-term decision-making, where price volatility is important. If you are
planning to buy and sell within a short period, beta is a good measure of risk.
However, as a single predictor of risk for a long-term investor, the beta
has too many flaws. Careful consideration of a company’s fundamentals will give
you a much better picture of the potential long-term risk.
[ 本帖最后由 invest4long 于 2008-11-3 01:16 编辑 ] | 
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发表于 2008-11-3 12:14 AM
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