OriginalQuestion:
Is Positive Beta Better than Negative Beta?
A Beta factor represents risk in a financialinstrument or commodity. Explain the reasons for changes in beta and explain ifone should be more concerned with a negative versus positive factor. Be sure toreference volatility. Please provide an example of negative Beta.
StudentNumber #1 Response:
Beta is the measure of volatility or systematic riskof a security as compared to the whole market (Bates, Kidwell, Parrino, 2015).It is often used to calculate expected returns and beta that is less than 1 isless likely to be volatile while a beta over 1 will be more volatile than themarket. An investor should be concerned with negative and positive factors ofsecurities because this will determine how someone chooses to invest. A stockwith a positive beta that is greater than one may be more volatile with higherrisk but also offer higher returns, examples would be something like techstocks as opposed to utilities stocks which usually have a beta of less thanone and offer more stability but a lower rate of return.
A good example of negative beta would be bonds in aportfolio which has the characteristics of negative beta because it usuallymoves opposite of the market (Caplinger, 2012). By having bonds which providenegative beta in a portfolio like a 401k it kind of offers some protectionagainst positive beta which because of their volatility can make and lose a lotof value. The bonds with negative beta can act as a counter balance insuringthat even though there will not be a high return rate there will also not behuge losses.
References:
Bates, T. Kidwell, D. Parrino, R. (2015). Fundamentalsof Corporate Finance. 3rdEdition. Retrieved 04/27/2016
Caplinger, D. (2012). Negative beta stocks: Worthbuying? Retrieved 04/27/2016 from
http://www.fool.com/investing/beginning/2012/12/12/negative-beta-stocks-worth-buying.aspx
StudentNumber #2 Response:
Anyone who plays the stocks has a firm understandingof beta. One can look at the beta of a stock to get a better understanding ofhow the stock reacts to the market. According to investopedia.com, "Betais calculated using regression analysis, and you can think of beta as thetendency of a security's returns to respond to swings in the market. A beta of1 indicates that the security's price will move with the market. A beta of lessthan 1 means that the security will be less volatile than the market. A beta ofgreater than 1 indicates that the security's price will be more volatile thanthe market. For example, if a stock's beta is 1.2, it's theoretically 20% morevolatile than the market" (2015).
While a beta factor represents a risk, there is such a thing as a negativebeta. According to blogspot.com, "By that definition, any investment thatwhen added to a portfolio, makes the overall risk of the portfolio go down, hasa negative beta. A more intuitive way of thinking about this is that a negativebeta investment represents insurance against some macro economic risk thataffects the rest of your portfolio adversely. A standard example that isoffered for a negative beta investment is gold, which acts as a hedge againsthigher inflation (which devastates financial investments such as stocks andbonds). It is also true that puts on stocks and selling forward contractsagainst indices will have negative betas" (2009). When there is a negativebeta, this means that the overall rate on return of the investment has beenreduced. In the example of gold, the rate of return on the investment of goldis typically low, thus, making it a potentially poor investment.
Reference:
http://www.investopedia.com/terms/b/beta.asp
http://aswathdamodaran.blogspot.com/2009/02/can-betas-be-negative-and-other-well.html
FAQs
Positive beta assets or securities typically move along with the market, whereas negative beta assets or securities typically move against the market. A stock with a beta larger than 1.0 is thought to be more volatile than the overall market, whereas one with a beta below 1.0 is thought to be less volatile.
Is positive beta better than negative beta? ›
A positive beta is associated with a tendency of the portfolio to move in the same direction as the market. A negative beta is associated with the expectation that a portfolio will move in the opposite direction of the market. A beta close to zero indicates the portfolio is not influenced by the market's direction.
Is it better to have a higher beta? ›
A higher beta indicates a stock is more volatile than the market and carries more risk—but generally has the potential for higher returns. On the other hand, low-beta stocks typically pose less risk but yield lower returns.
What is the best beta value? ›
Beta is used as a proxy for a stock's riskiness or volatility relative to the broader market. A good beta will, therefore, rely on your risk tolerance and goals. 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.
What is positive beta and negative beta? ›
Positive Beta: If the Beta linked to an asset is positive, the asset's price would increase with an upswing in the market and decrease if the market falls. Negative Beta: If the Beta is negative, the asset's price would move in the opposite direction to the market.
Is negative beta better? ›
Negative beta: A beta less than 0, which would indicate an inverse relation to the market, is possible but highly unlikely. Some investors argue that gold and gold stocks should have negative betas because they tend to do better when the stock market declines. Beta of 0: Basically, cash has a beta of 0.
What does a positive beta indicate? ›
Beta is a concept that measures the expected move in a stock relative to movements in the overall market. A beta greater than 1.0 suggests that the stock is more volatile than the broader market, and a beta less than 1.0 indicates a stock with lower volatility.
What is the beta of the S&P 500? ›
The term "beta" is simply a measure of a stock's sensitivity to the movement of the overall stock market. The beta of the S&P 500 is expressed as 1.0. The beta of an individual stock is based on how it performs in relation to the index's beta.
Why is high beta good? ›
A high beta index refers to a market index that is made up of stocks with higher-than-average volatility as compared to the overall stock market. Some investors aim to maximize returns on investment by investing in high beta stocks, especially during periods when the overall stock market is extremely bullish.
Does higher beta mean more return? ›
It is used as a measure of risk and is an integral part of the Capital Asset Pricing Model (CAPM). A company with a higher beta has greater risk and also greater expected returns.
A negative beta describes an investment that tends to increase in price when the general market price falls and vice versa. Securities Lending is an example of an investment strategy which has a negative beta. This is because, as the returns available from the market fall, lending rates will generally rise.
Is a beta of 5 good? ›
A beta lower than one suggests that a stock is less risky than the market. A beta of . 5 suggests that the stock is 50% less volatile than the market. Adding this type of stock to a portfolio lowers the overall risk but has a similar effect on potential return.
What is a strong beta coefficient? ›
A standardized beta coefficient compares the strength of the effect of each individual independent variable to the dependent variable. The higher the absolute value of the beta coefficient, the stronger the effect. For example, a beta of -. 9 has a stronger effect than a beta of +. 8.
Does negative beta mean less risk? ›
Stocks with a beta of less than 1 have a smoother ride as their moves are more muted than the market's, but they'll usually still go up when the market goes up and down when the market goes down. Securities with a negative beta, which is unusual, will typically move inversely to the market.
Why is beta value negative? ›
If beta value is negative, the interpretation is that there is negative correlation between the dependent variable and the corresponding independent variable if the other independent variables are held constant.
Is a positive or negative alpha better? ›
A positive alpha indicates the security is outperforming the market. Conversely, a negative alpha indicates the security fails to generate returns at the same rate as the broader sector. So, according to this definition, a stock with a negative alpha is underperforming.
What happens when beta is negative? ›
A negative beta describes an investment that tends to increase in price when the general market price falls and vice versa. Securities Lending is an example of an investment strategy which has a negative beta.
Is beta plus or beta minus more common? ›
A lot of natural background radiation on Earth is due to fission or alpha-decay of heavy radioactive elements. The remains of fission or alpha-decay are neutron-rich nuclei, so beta-minus decay is more common on Earth.
What if you have a negative beta? ›
A negative beta means the stock moves the opposite way as it's benchmark. So a stock with a beta of -. 5 would go up 50 cents if the S&P 500 was down a dollar.
