Is a Negative Beta Coefficient More Risky Than a Positive in the Stock Market? Zacks

octubre 6, 2021 en Forex Trading

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.

The financial crisis in 2008 is an example of a systematic-risk event; no amount of diversification could have prevented investors from losing value in their stock portfolios. Beta effectively describes the activity of a security’s returns as it responds to swings in the market. A security’s beta is calculated by dividing the product of the covariance of the security’s returns and the market’s returns by the variance of the market’s returns over a specified period. He followed up by asking if there were any situations in which equity would be less expensive than debt… I struggled for a bit and said I couldn’t think of any because debt is always senior to equity.

  • Unlevered beta (or asset beta) measures the market risk of the company without the impact of debt.
  • Create a methodical and flexible plan for incorporating consumer input into your strategy.
  • Cal-Maine distributes its eggs through grocery chains throughout the US.
  • Furthermore, even assets that, in theory, could have negative betas (gold, for instance) seem to have positive betas when securitized (gold shares, gold ETF).
  • For example, a company with a β of 1.5 denotes returns that are 150% as volatile as the market it is being compared to.

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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Isolating and removing the debt component of overall risk results in unlevered beta. Taking a more sophisticated approach and using the CAPM, you can understand how the level of systemic risk impacts the expected return. In the short-term, beta can give frequent traders an indication of risk. Moreover, a stock’s level of volatility may change over time as its circumstances change. Stocks with negative betas move in the opposite direction of the market. Finally, calculate the variance of the index (derived from the index daily price changes to show how they are distributed around the average), and divide the covariance by the variance.

  • I would think about it this way, essentially you would be paying for insurance…
  • More precisely, it is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole.
  • For example, if one purchased a put option on the S&P 500, the beta would vary as the price of the underlying index (and indeed as volatility, time to expiration and other factors) changed.
  • However, ignoring them can have serious consequences, and not just reputational.

That is, returns would be correlated with the market’s overall direction, but would return double what the market did during the period. On average, we’d expect an asset with this Beta value to be 200% as volatile as the benchmark. The numerator is the covariance of the asset in question while the denominator is the variance of the market. These complicated-sounding variables aren’t actually that difficult to compute.

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.

Beta Calculator

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.

Beta is one of the most widely-used measures of stock market volatility. Beta can be a valuable tool for investors when analyzing stocks for inclusion in their portfolios. Beta is used as a proxy for a stock’s riskiness or volatility relative to the broader market. If you wish to replicate the broader market in your portfolio, for instance via an index ETF, a beta of 1.0 would be ideal. If you are a conservative investor looking to preserve principal, a lower beta may be more appropriate.

How can companies avoid legal action from customers?

This type of decay does not change the atomic mass, but the atomic number is changed. The protons are positively charged, the electrons are negatively charged, and the neutrons are neutral. Like charges repel each other (positive to positive or negative to negative). Beta particles are negatively charged so they will be attracted towards a positively charged plate . And positive alpha particles will be attracted towards a negatively charged plate. Because they consist of charged particles, alpha and beta radiation can also be deflected by magnetic fields .

We’ve seen how significant the legal consequences of not responding to negative feedback can be. One example is LG, which faced growing complaints concerning a faulty refrigerator component. As a result, the electronics manufacturer had a $1.5 million class action brought against them, which, as of May 24, 2022, has been reported as paying out up to $1,150 per claim.

Is Walmart a Low-Beta Stock?

The beta calculation is used to help investors understand whether a stock moves in the same direction as the rest of the market. It also provides insights into how volatile–or how risky–a stock is relative to the rest of the market. For beta to provide any useful insight, the market that is used as a benchmark should be related to the stock. For example, calculating a bond ETF’s beta using the S&P 500 as the benchmark would not provide much helpful insight for an investor because bonds and stocks are too dissimilar.

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 low-beta stock is in a company or industry that is perceived as less sensitive to the factors that affect stock prices in general or is even likely to move in the opposite direction. A beta value of more than 1.0 implies that the stock will be more volatile than the market, while a beta value of less than 1.0 predicts lower volatility. In a bull market, a beta above 1.0 will likely produce better returns but also come with more risk. A negatively charged beta particle is identical to an electron, while a positively charged beta particle is called a positron. Large amounts of beta radiation may cause skin burns, and beta emitters are harmful if they enter the body.

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.

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.

What Is a Zero-Beta Portfolio?

However, since beta is calculated using historical data points, it becomes less meaningful for investors looking to predict a stock’s future movements. Beta is also less useful for long-term investments since a stock’s volatility can change significantly from year to year, depending upon the company’s growth stage and other factors. Furthermore, the beta measure on a particular stock tends to jump around over time, which makes it unreliable as a stable measure. Beta is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets (usually stocks). CAPM is widely used as a method for pricing risky securities and for generating estimates of the expected returns of assets, considering both the risk of those assets and the cost of capital.

Since companies have different capital structures and levels of debt, an investor can calculate the unlevered beta to effectively compare them against each other or against the market. Levered beta (equity beta) is a measurement that compares the volatility of returns of a company’s stock against those of the broader market. In other words, it is a measure of risk, and it includes the impact of a company’s capital structure and leverage. Equity beta allows investors to assess how sensitive a security might be to macro-market risks. For example, a company with a β of 1.5 denotes returns that are 150% as volatile as the market it is being compared to.