Publishing Guidelines: This article may be freely published so long as
author's resource box, by lines, and copyright are included.TITLE: Beta Factors: How they can be used in current situation AUTHOR: Andy George CONTACT: akgeorge@cytanet.com.cy
COPYRIGHT: ©2004 by Andy George. All rights reserved
***** Beginning of article ***** BETA FACTORS: HOW THEY CAN BE USED IN THE CURRENT SITUATION?
Comment by: Andy K George F.C.A.
Ever since turn of century, world stock markets have been very volatile. In other words there have been significant movements (up or down) in share prices. This phenomenon has been evidenced by collapse in recent years of share prices of dot com companies (e.g. Yahoo, Amazon etc.) and sharp falls in share prices of telecommunication stocks (e.g. British Telecom, Marconi etc.). Yet despite these events there is very little emphasis placed on measuring volatility of stocks.
The aim of this article is to explain one method of measuring volatility namely beta factors and how investors can interpret this information. The article aims to state how investors can use beta factor analysis to their advantage when there are political uncertainties affecting markets. Though some stockbroker firms calculate beta factors of certain stocks quoted in their respective stock exchanges, investors have little access to these figures. In more developed markets many stockbroker firms do have access to beta factors but it is only in recent years that investors have access to this information.
BETA FACTORS: The beta of an investment is a relative measure of systematic risk of an investment. In other words it measures specific risk of company's shares relative to market as a whole. In general, sign of beta (+/-) indicates whether, on average, investment's returns move with market or in opposite direction to market. The scale or value of beta indicates relative volatility of particular stock.
A beta of +0.25 for instance, would indicate that on average, investment's returns move one quarter as much as markets do in same direction. If market rose by 10%, investment would be expected to rise by 2.5% but on other hand if market fell by 10% investment would be expected to fall by only 2.5%. A beta of -0.1 would indicate that on average, investment's returns move one tenth as much as market's do, but in opposite direction. If market rose by 10%, investment would be expected to fall by 1%. Hence we can summarise a number of situations:
If Beta > 1 this means that investment's returns will move, on average, in same direction as market's returns, but to a greater extent. If Beta = 1 this means that investment's returns will move, on average, in same direction as market's returns, and to same extent. If 0 < Beta < 1 then investment's returns will move, on average, in same direction as market's returns, but to a lesser extent. If Beta = 0 this means that investment's returns are uncorrelated with those of market. This would be case if investment were risk-free, but more generally this situation will arise when all of investment's risk is unsystematic. Unsystematic risk measures specific risk of company. If Beta < 0 then investment's returns will move, on average, in opposite direction to market's returns, to a lesser extent if Beta > -1, to same extent if Beta = -1, and to a greater extent if Beta < -1. In practice it is rare to find negative beta stocks since they go against trend of market. One possible sector that could consist of negative beta stocks is gold industry that tends to go against trend shown by equity markets.
