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re: Stocks...
Posted on 5/2/10 at 2:50 pm to TheHiddenFlask
Posted on 5/2/10 at 2:50 pm to TheHiddenFlask
quote:
I don't really see how you got that.
He said it moves with the market. I think that implies the same direction.
That was my initial thought, too, although fizz thinks otherwise and appears to have a much better understanding of the topic than myself. I've always thought Beta related to the direction in which swings were likely to take place, with Beta values of 1 more likely to be in the same direction as the general market (relative to stocks with Beta values further away from 1), and Beta values far away from 1 less likely to be in the same direction as the general market (relative to stocks with Beta values closer to 1). But if Beta merely signals volatility in terms of percentage, and not in terms of direction, then I've been reading too much into it.
This post was edited on 5/2/10 at 2:51 pm
1
Posted on 5/2/10 at 2:52 pm to TheHiddenFlask
But its based on co-variance and standard deviation, both of which are two-sided.
Posted on 5/2/10 at 2:54 pm to kfizzle85
quote:
But its based on co-variance and standard deviation, both of which are two-sided.
But betas can be negative. A beta of negative one would indicate moving opposite the market.
Posted on 5/2/10 at 2:55 pm to RedStickBR
quote:
Beta Drawbacks
No matter how valuable betas may be, you should be careful when using them alone, since they may not provide you with accurate information. This is caused by a number of reasons. The first one is that beta calculations are made on the basis of past information. This means that they may not provide accurate predictions regarding the risk of the investment.
Additionally, beta lacks the consideration of major changes in the industry or sector, which may lead to inaccurate representation of risk levels. Finally, betas measure the volatility of stocks as compared to the whole market. However, this volatility may have a different direction. As a result a stock that is outperforming will have a bet of greater than 1 in a sustained advancing market.
Betas provide their benefits mostly in the short-term, when the movement of the price is of higher importance. Thus, you should consider the beta value if you are about to buy or sell a stock over a short period of time.
LINK ][LINK]
Posted on 5/2/10 at 2:57 pm to TheHiddenFlask
quote:
But betas can be negative. A beta of negative one would indicate moving opposite the market.
Theoretically it can be, but when have you ever seen that in practice? Again, that's why I said if you want to look at direction, you need to look at correlation, not beta.
Posted on 5/2/10 at 2:59 pm to kfizzle85
From the beta king:
LINK ][LINK]
quote:
Are there actual investments out there that have negative betas? I know that there are stocks with negative regression betas, but those are the mostly the result of something strange happening during the period of the regression - an extended lawsuit or acquisition battle throwing off the correlation with the market- rather the true betas. In fact, in my fifteen years of updating betas by sector, I have still not found a sector with a negative beta. Furthermore, even assets that, in theory, could have negative betas (gold, for instance) seem to have positive betas when securitized (gold shares, gold ETF). There seems to be something about the securitization process that makes real assets behave more like financial assets.
LINK ][LINK]
Posted on 5/2/10 at 3:02 pm to kfizzle85
fizz, this is taken from Wikipedia, so take it for what it's worth:
This is in line with what's always been my understanding. However, what you're saying also makes sense although my understanding of standard deviation and correlation is pretty rusty.
ETA: This, on a second reading, is still not in line with my understanding though. I thought a Beta of 2 would mean it would be less likely to move in the same direction as the market than a stock with a Beta of 1. This author is saying it would be just as likely to move in the direction as the market, but by a factor of 2.
Now I'm really confused. We have 3 or 4 different theories going now LOL. This is the best way to learn though.
quote:
By definition, the market itself has an underlying beta of 1.0, and individual stocks are ranked according to how much they deviate from the macro market (for simplicity purposes, the S&P 500 is usually used as a proxy for the market as a whole). A stock that swings more than the market (i.e. more volatile) over time has a beta whose absolute value is greater than 1.0. If a stock moves less than the market, the absolute value of the stock's beta is less than 1.0.
More specifically, a stock that has a beta of 2 follows the market in an overall decline or growth, but does so by a factor of 2; meaning when the market has an overall decline of 3% a stock with a beta of 2 will fall 6%. Betas can also be negative, meaning the stock moves in the opposite direction of the market: a stock with a beta of -3 would decline 9% when the market goes up 3% and conversely would climb 9% if the market fell by 3%.
This is in line with what's always been my understanding. However, what you're saying also makes sense although my understanding of standard deviation and correlation is pretty rusty.
ETA: This, on a second reading, is still not in line with my understanding though. I thought a Beta of 2 would mean it would be less likely to move in the same direction as the market than a stock with a Beta of 1. This author is saying it would be just as likely to move in the direction as the market, but by a factor of 2.
Now I'm really confused. We have 3 or 4 different theories going now LOL. This is the best way to learn though.
This post was edited on 5/2/10 at 3:07 pm
Posted on 5/2/10 at 3:03 pm to kfizzle85
Gold was actually the one thing I was thinking of that would have a negative Beta value, although it, too, appears to also have a positive value according to your source. What about an inverse ETF? Is that the only example that would work?
Posted on 5/2/10 at 3:05 pm to kfizzle85
Man, this thread is really delivering. I've learned a lot.
Posted on 5/2/10 at 3:12 pm to TheHiddenFlask
Summary of views:
1. My initial view: Betas close to 1 move in same direction as market. Betas far away from 1 are less likely to move in same direction, with those being far below 1 being less volatile than general market, and those being far above 1 being more volatile than general market.
2. Fizz's view: Beta is only determinative of volatility, not direction. Beta of 1 will be more likely to move by same percentage as general market. Beta far below 1 will move at a percentage less than the market moves, but in either direction. Beta far above 1 will move at a percentage greater than the market moves, but in either direction.
3. Wiki view: Any positive Beta value moves in same direction as market. Beta value of 2 moves in same direction as market, but twice as much. Beta value of .5 moves in same direction as market, but half as much. Beta value of -2 moves in opposite direction as market, but twice as much. Beta value of -.5 moves in opposite direction as market, but half as much.
And all three views have documentary support. Good idea for a thesis? I'm counting on you both, THF and fizz, to set the record straight.
1. My initial view: Betas close to 1 move in same direction as market. Betas far away from 1 are less likely to move in same direction, with those being far below 1 being less volatile than general market, and those being far above 1 being more volatile than general market.
2. Fizz's view: Beta is only determinative of volatility, not direction. Beta of 1 will be more likely to move by same percentage as general market. Beta far below 1 will move at a percentage less than the market moves, but in either direction. Beta far above 1 will move at a percentage greater than the market moves, but in either direction.
3. Wiki view: Any positive Beta value moves in same direction as market. Beta value of 2 moves in same direction as market, but twice as much. Beta value of .5 moves in same direction as market, but half as much. Beta value of -2 moves in opposite direction as market, but twice as much. Beta value of -.5 moves in opposite direction as market, but half as much.
And all three views have documentary support. Good idea for a thesis? I'm counting on you both, THF and fizz, to set the record straight.
This post was edited on 5/2/10 at 3:14 pm
Posted on 5/2/10 at 3:24 pm to RedStickBR
Yeah, I'm not saying that a stock with a beta of 2 won't move in the same direction as the market, I'm just saying that beta doesn't explicitly tell you that. So it might, or it might not. As one of the quotes above mentioned, for short-term movements, it may very well do that on a regular basis. However, to see which direction a stock moves, you need correlation.
To wit:
LINK ][LINK]
To wit:
quote:
Investopedia explains Correlation
Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random.
In real life, perfectly correlated securities are rare, rather you will find securities with some degree of correlation.
LINK ][LINK]
Posted on 5/2/10 at 3:33 pm to kfizzle85
So cliffnotes:
Correlation - how often the stock moves the same direction as the market
Beta - how similar the amount volatility is to the market
So a negative beta would indicate that when the market becomes more volatile the stock would become less volatile?
Correlation - how often the stock moves the same direction as the market
Beta - how similar the amount volatility is to the market
So a negative beta would indicate that when the market becomes more volatile the stock would become less volatile?
Posted on 5/2/10 at 3:37 pm to TheHiddenFlask
This question is going to Don Chance on Monday.
Posted on 5/2/10 at 3:39 pm to kfizzle85
And I have to say, beta is covariance of x,y/std dev of y, and covariance is a measure of correlation. So it must account for correlation. My understanding of statistics and math is not deep enough to understand if I'm wrong. I want to say that dividing by the standard deviation makes the correlation directionless, so if you want to know the direction of a stock (in relation to another asset), use correlation, and if you want to know what magnitude it will change by, use beta. I know that using those statistics will give you that answer definitively, so I'm standing by my thoughts.
Posted on 5/2/10 at 3:41 pm to TheHiddenFlask
quote:
So cliffnotes:
Correlation - how often the stock moves the same direction as the market
Beta - how similar the amount volatility is to the market
That's my understanding.
quote:
So a negative beta would indicate that when the market becomes more volatile the stock would become less volatile?
Making my head hurt brah.
quote:
This question is going to Don Chance on Monday.
Yes, please ask him. I was about to email my professor, but I'd rather hear it from him. Beta is a pretty fundamental concept, and it appears that there is a lot of misunderstanding about what it actually does, which I'm ashamed to admit to be honest.
Posted on 5/2/10 at 3:46 pm to kfizzle85
quote:
I was about to email my professor, but I'd rather hear it from him.
Let's double down and compare. I'll shoot an e mail over to him today.
Posted on 5/2/10 at 3:53 pm to TheHiddenFlask
My remaining question is if beta is not tied to direction what is the role of negative beta. The fact that there's negative beta necessitates direction to be taken into account simply due to the fact that "opposite volatility" doesn't make sense.
I think the wiki view makes the most sense at this point:
Beta value of -2: asset moves twice as much as market but in opposite direction I.e. Double inverse ETF
Beta value of -1: asset moves just as much as market but in opposite direction I.e. Inverse ETF
Beta value of 0: asset is independent of market I.e. Real estate? Has it's own market but market in this context is stock not real estate
Beta value of 1: asset moves as much as market in same direction I.e. Bull ETF
Beta value of 2: asset moves twice as much as market in same direction I.e. Double bull ETF
I think the wiki view makes the most sense at this point:
Beta value of -2: asset moves twice as much as market but in opposite direction I.e. Double inverse ETF
Beta value of -1: asset moves just as much as market but in opposite direction I.e. Inverse ETF
Beta value of 0: asset is independent of market I.e. Real estate? Has it's own market but market in this context is stock not real estate
Beta value of 1: asset moves as much as market in same direction I.e. Bull ETF
Beta value of 2: asset moves twice as much as market in same direction I.e. Double bull ETF
This post was edited on 5/2/10 at 3:57 pm
Posted on 5/2/10 at 3:56 pm to kfizzle85
quote:
Beta is a pretty fundamental concept, and it appears that there is a lot of misunderstanding about what it actually does, which I'm ashamed to admit to be honest.
You shouldn't be ashamed. If anything, the people who are authoritative in the field but still haven't cleared up the issue should be. Each of the three views has documentary support. Or maybe it's just people reading to much into it and no fault of the people in the field. I'm all confused now though.
This post was edited on 5/2/10 at 4:01 pm
Posted on 5/2/10 at 4:00 pm to TheHiddenFlask
quote:
Let's double down and compare. I'll shoot an e mail over to him today.
Will do.
ETA: Oh and thanks for helping me procrastinate for another hour. This entire weekend was a complete fail.
This post was edited on 5/2/10 at 4:01 pm
Posted on 5/2/10 at 4:00 pm to RedStickBR
E mail sent.
All in all, I think Kfizz is right, just based on sensibility, but up until this point, I didn't think about it that way.
All in all, I think Kfizz is right, just based on sensibility, but up until this point, I didn't think about it that way.
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