I'm trying to find out how strong the statistical correlation is
between the price of Oracle stock and either the S&P 500 index or
Vanguard's total stock market index. Note that I am not asking you to
tell me what percentage of the S&P 500 is made up of Oracle stock.
(The reason is, I have stock options I can't exercise, and I'm trying
to decide how much to adjust the rest of my portfolio to keep from
being over-exposed to stock market fluctuations.) |
Request for Question Clarification by
omnivorous-ga
on
16 Feb 2004 10:01 PST
Upscale --
You're asking for the beta of the Oracle stock, something commonly
found in analysts reports. Is that all that you're seeking here?
Best regards,
Omnivorous-GA
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Clarification of Question by
upscale-ga
on
17 Feb 2004 00:20 PST
I'm not sure. Ok, so I looked up a definition of Beta:
"A mathematical measure of the sensitivity of rates of return on a
portfolio or a given stock compared with rates of return on the market
as a whole. A beta of 1.0 indicates that an asset closely follows the
market; a beta greater than 1.0 indicates greater volatility than the
market."
So, I've only taken fairly basic statistics, and I'm trying to make
sense of this definition given what I do know. I'm not sure whether
Beta is more related to correlation or variance or some combination of
the two. Let me give you a few example cases, and you tell me a
ballpark of what the beta might be for each:
1) A stock that does exactly what the S&P 500 does. On a day when the
S&P 500 goes up (or down) X%, this stock also goes up (or down) X%.
2) A stock that acts similarly toe the S&P 500 but is more volatile.
If the S&P 500 moves X%, this stock moves 2X%.
3) A stock that goes up and down about as much as the S&P 500 but
follows a completely different pattern. It peaked in 1995, crashed
during the tech boom, and then skyrocketed as all the other stocks
were crashing.
4) A stock that always goes up by exactly 10% every year.
5) A stock whose value never changes.
So what would the beta be for these examples?
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Request for Question Clarification by
omnivorous-ga
on
17 Feb 2004 07:37 PST
Upscale --
A stock with a beta of 1 moves with the market.
One less than 1 is less volatile. Good examples here would be
utilities or food stocks, which have more or less level demand even
when the general economy slows (or speeds up).
The more volatile stocks tend to be growth areas which can see
fantastic spikes in demand based on the economy (traditionally
semiconductors, airlines). Betas of 1.75 or 2 are not uncommon.
Few stocks do (3) or (4) -- and even if they have for a year or two,
the pattern can't hold long-term. Long-term is always the problem:
many argue that betas should be measured over a 3-year period because
it represents the current environment; but a 3-year period doesn't
cover and complete up/down economic cycle so may be too short.
Obviously (5) is also unlikely in a changing market. There are
possibilities: a fund with fixed cash-flow and little change in
interest rates -- but the nature of markets is change, so this doesn't
happen either.
Now, let's get back to the core issue: protecting value in unexercised
stock options. The proven strategies wouldn't necessarily relate to
the beta of Oracle stock; they'd involve:
* diversification through purchase of a portfolio in businesses
unrelated to Oracle
* use of mutual funds to easily create a diversified portfolio
* use of traded options to insure current value of your options. For
example, if your options were for 1,000 shares of Oracle at $10 per
share exercisable in July, you could buy 10 Oracle July put options
(10 options = 1,000 shares) and should the stock decline your options
increase. There is a cost to doing this AND one also has to be
careful with company rules on insider trading, but it provides
insurance (at a cost).
Best regards,
Omnivorous-GA
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