Goodwill impairment is an accounting term used to describe a reduction in the value of goodwill on a company’s balance sheet. Beta is a useful number to look at when you want to see whether a stock is likely to move up or down with the market or move in the opposite direction of the market.
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Is it possible to find out S.D of the portfolio which consists these two securities? Rebecca Baldridge, CFA, is an investment professional and financial writer with over 20 years’ experience in the financial services industry. In addition to a decade in banking and brokerage in Moscow, she has worked for Franklin Templeton Asset Management, The Bank of New York, JPMorgan Asset Management and Merrill Lynch Asset Management. She is a founding partner in Quartet Communications, a financial communications and content creation firm. It’s not a forward-looking metric, so take the time for fundamental research to augment your analysis. Open your spreadsheet and enter the date of each day in your specified timeframe.
- When the market falls, then the negative-beta investment will tend to rise.
- Beta refers to the volatility of a stock in relation to the market.
- By including a mix of assets with varying beta values, investors can create a balanced portfolio that aligns with their risk preferences.
- Doing this yields the amount of systemic risk a security introduces into a portfolio and how that risk could impact the expected return.
R-squared is a statistical measure that compares the security’s historical price movements to the benchmark index. A security with a high R-squared value indicates a relevant benchmark. A gold exchange-traded fund (ETF), such as the SPDR Gold Shares (GLD), is tied to the performance of gold bullion. Consequently, a gold ETF would have a low beta and R-squared relationship with the S&P 500. Value investors scorn the idea of beta because it implies that a stock that has fallen sharply in value is riskier than it was before it fell. A value investor would argue that a company represents a lower-risk investment after it falls in value—investors can get the same stock at a lower price despite the rise in the stock’s beta following its decline.
Does Beta Mean Alpha?
Companies whose share prices were less volatile than the S&P 500 will have a beta value under 1.0. Conversely, share prices that were more volatile than the S&P 500 will have beta values over 1.0. This stock has a beta of 1.5, which is 50% more volatile than the market.
True Tamplin, BSc, CEPF®
When long-term market-betas are required, further regression toward the mean over long horizons should be considered. Attempts have been made to estimate the three ingredient components separately, but this has not led to better estimates of market-betas. The benchmark should be relevant to the stock, and the Treasury maturity should vary based on the investor’s proposed timeline.
Risks that affect the overall market are by their nature difficult to predict and hedge against. One major drawback of beta is that it’s a backward-looking metric. It’s calculated based on past returns, which may not be consistent with future returns. Cash effectively has a beta of zero, because its value can beta be negative has no correlation with any stock market index. Cash doesn’t increase or decrease in value along with the S&P 500. These have some similarity to bonds, in that they tend to pay consistent dividends, and their prospects are not strongly dependent on economic cycles.
A stock’s price variability is important to consider when assessing risk. If you think about risk as the possibility of a stock losing its value, beta has appeal as a proxy for risk. Think of an early-stage technology stock with a price that bounces up and down more than the market. It’s hard not to think that stock will be riskier than, say, a safe-haven utility industry stock with a low beta. A stock’s beta will change over time because it compares the stock’s return with the returns of the overall market. Numerically, it represents the tendency for a security’s returns to respond to swings in the market.
Stocks that have a low beta, such as consumer staples, are often used to hedge a portfolio of higher-beta stocks. These low-beta stocks are relatively unaffected by the market’s gyrations or even benefit in times when the economy is poor. This can be achieved by obtaining other stocks that have negative or low betas, or by using derivatives to limit downside losses. In 2007, Altman Z-score indicated that the companies’ risks were increasing significantly as the credit ratings of specific asset-related securities had been rated higher than they should have been.