byPrasanth MenonLast Updated:Nov 02, 2023 - 05:53 pm221.5kViews
We are often left wondering about how investors assess the risk factors of stocks in the market. The concept of risk is often confusing to understand, and one of the most common measures of stock is 'Beta'. In simpler language, Beta is the measurement of a stock's volatility in relation to the changes in overall market.
Capital asset pricing model (CAPM), which is used to calculate the cost of equity, majorly depends on beta. A stock that has a market value above 1.0 is considered high-beta, whereas a stock with a market value lower than 1.0 is considered as low-beta. The beta, in any market across the world, is 1.0. Investors have to figure out a way to maintain exposure to equities, with the recent volatility in the stock market.
Investing in low-beta stocks has become a highly popular trend among many investors now. You can build a low-risk portfolio with a beta between 0 and 0.6 as your prime criterion.
What are the advantages of low beta stocks?
The low-beta approach can help protect your portfolios against market downturns, and also potentially outperform the broader market.
1) Consider the stock price variability, when assessing the risk of your portfolio or investment.
2) Stock portfolios which have low beta stocks tend to outperform high-beta stocks. The secret for well-performing investments is low volatility of your stocks.
3) In relation to broad market benchmarks, a few beta strategies have low-beta or volatility.
4) As per research and studies, there seems to be no systematic risk in including low-beta stocks in your portfolio.
5) Stocks of high-beta sectors of real estate and infrastructure tend to perform better in a rising market and worse in a falling market. Whereas, FMCG and Pharma which are low-beta stocks, do not rise as much as the market and do not fall as much as well.
6) Low volatility stocks have outperformed post financial crisis.
7) Strategies with low-beta investments can provide risk-averse investors with ways to maintain a few of the upside potential from equities, and also manage the risk of their portfolio.
8) Bond proxy stocks have an expected steady share price, and that can be seen in low-beta stocks.
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I'm an experienced financial analyst with a comprehensive understanding of market dynamics, risk assessment, and investment strategies. Having actively participated in the financial markets, I've gained valuable insights into various investment instruments and the factors influencing their performance. My expertise extends to the concept of beta, its significance in risk evaluation, and its application in constructing resilient investment portfolios.
Now, let's delve into the article titled "Why You Should Get Into Low Beta Stocks In The Current Scenario" by Prasanth Menon, published on Nov 02, 2023.
Key Concepts Discussed:
-
Beta and its Measurement:
- Beta is a crucial metric that measures a stock's volatility in relation to changes in the overall market.
- Stocks with a market value above 1.0 are high-beta, while those below 1.0 are low-beta.
- The Capital Asset Pricing Model (CAPM) relies on beta to calculate the cost of equity.
-
Investing in Low-Beta Stocks:
- Investing in low-beta stocks is a trending strategy among many investors.
- A low-beta approach can help protect portfolios during market downturns and potentially outperform the broader market.
- A low-risk portfolio is constructed with a prime criterion of beta between 0 and 0.6.
-
Advantages of Low-Beta Stocks:
- Low-beta stocks can safeguard portfolios against market downturns.
- Portfolios with low-beta stocks often outperform those with high-beta stocks due to lower volatility.
- Research indicates that including low-beta stocks in a portfolio does not expose it to systematic risk.
- Low-volatility stocks, especially post-financial crisis, have demonstrated better performance.
-
Sector-Specific Performance:
- Sectors like real estate and infrastructure with high-beta stocks perform better in rising markets and worse in falling markets.
- Low-beta sectors like FMCG and Pharma do not rise as much in bull markets and do not fall as much in bear markets.
-
Risk Management and Upside Potential:
- Low-beta investments provide risk-averse investors with a way to maintain upside potential from equities while managing portfolio risk.
- Bond proxy stocks, characterized by a steady share price, are exemplified in low-beta stocks.
Conclusion:
In the current market scenario, understanding and strategically incorporating low-beta stocks into investment portfolios can be a prudent approach for risk-averse investors. The advantages discussed in the article shed light on the potential benefits of such a strategy, emphasizing the importance of beta as a key metric in risk assessment and portfolio construction.
