V. 20:10 (80-84): If Beta Doesn’t Work, What Does? by William G.S. Brown, Ph.D.

V. 20:10 (80-84): If Beta Doesn’t Work, What Does? by William G.S. Brown, Ph.D.
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If Beta Doesn’t Work, What Does? by William G.S. Brown, Ph.D.

Beta not doing it for you? Try the price regression line.

Conventional wisdom says that a stock (or stock fund) having a beta close to 1.0 will follow the market. Is that true? This piece of common knowledge can easily be verified by going to a stock or fund screen and searching for investments with beta greater than 0.99 but less than 1.01 and a five-year growth between -90% and +200%. In Figure 1 you will find the unusual values I came up with when I used the stock screener at www.hoovers.com.

If a stock with a beta of 1.00 followed the market, then it would be impossible for one stock to gain 48.12% while another loses 50.64% when they both have a beta of 1.00. This clearly shows that beta is not a good indicator of how well a stock follows the market.




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