Hi cop189!!
Betas are widely used to measure of how much a stock will move in
relation to an index. It is a measure of its volatility and therefore
its risk. For example, an issue with a beta of 1.5 tends to move its
value 50% more than the total market, in the same direction; another
issue with a beta of 0.5 tends to move its value 50% less. If an issue
moved exactly as the market moved, it has a beta of 1.0. This means
that a high beta is typical of a volatile stock, that is more risky.
Low beta is typical of a stock that moves less than the market as a
whole, that is less risky. A stock with a negative beta moves in the
direction opposite to that of the market. With a beta of -1.0 a stock
has the same volatility as the market, but tends to rise when the
market falls, and vice versa.
The element of risk implies some return for taking that risk. A risk
averse investor has a low appetite for risk, so he would prefer lower
but consistent returns on his investments, therefore he will prefer
low volatility invests, that is stocks with low betas.
A person avid for higher returns would take higher risks in the hope
of getting such high returns. So he must invest in stocks that can
change their values in a highe rate than the market does, that is
portfolios with higher betas providing above average returns.
Therefore the risk averse investor would prefer that his portfolio not
be affected by market movements, so the beta of his portfolio must be
as lower as possible. He would seek to combine investments with low
and high betas, so that his portfolio is diversified and the
combination brings about a relatively risk free portfolio.
For reference see:
"Beta: Know the Risk" by Ben McClure
http://www.investopedia.com/articles/stocks/04/113004.asp
I hope that this helps you. Feel free to request for a clarification
if you need it.
Best regards.
livioflores-ga |
