As a result, they remain less volatile against market volatility. High beta stocks go up more than the index when the markets are bullish and go down more than the market index when the markets are bearish. Hence the portfolio manager will attempt to add more of high beta stocks when the market outlook is positive and will look to add more of low beta stocks when the market outlook is negative. Let us understand the significance of beta in portfolio management.

can beta be negative

Goes without saying, if you measure beta of a stock relative to a sectoral index, ensure that you do so against a relevant index. For instance, it makes sense to calculate beta of ICICI bank against Bank Nifty but not against, say, Pharma index. Beta calculation is used to help investors understand whether a stock moves in the same direction as the rest of the market. It also provides insights about how volatile or how risky a stock when compared to the rest of the market. Ultimately, an investor usually uses beta to try to gauge how much risk a stock is adding to a portfolio.

“It is very unusual for a low beta stock to double in a year but that was how 2020 was. In normal circumstances, high beta stocks will outperform in bull markets and underperform in bear markets,” Atish Matlawala, Sr Analyst, SSJ Finance & Securities told Moneycontrol. Now that we are clear with what beta stocks are, let us also understand what are alpha stocks. A stock’s BETA rating of less than 1 indicates that it is performing worse than or similar to the market as a whole. Investors may be able to get lower but consistent returns with these equities, which are known as low BETA stocks. These equities have a low-risk factor and are regarded as stable in the face of market turbulence.

How is Beta for a mutual fund calculated?

The returns in the stock market increase with the increase in the risk matrix of your investment. This proverb is frequently used in relation to the stock market. Every investor who enters the stock market aspires to maximise their investment returns.

When a nation’s economy is strong, the stock market is always trending upward, which enables the majority of businesses to produce good returns and raises the index or benchmark points. Investors buy shares of small and mid-cap companies that have the ability to surpass the index’s overall returns during such an uptrend using Alpha values. Beta is a numeric value that measures the variability of a stock to fluctuations in the stock market.

can beta be negative

And for this increase in valuation, you have to pay a heavy interest. Now if you can’t raise equity at this high valuation, that’s bad luck for you. So, while the market is moving in one direction, Beta helps you understand what direction your fund’s return is taking with respect to the market/benchmark movement. In other words, it measures the relative volatility of the mutual fund with respect to its benchmark. This volatility can help the investor in availing returns that can be higher than the market performance. This can be achieved by choosing the right funds with beta values that are in line with your investing goals and risk appetite.

Gold ETFs relatively carry a lower Beta value than equity ETFs because their primary motivators are distinct. If you’re interested in Levered and unlevered beta, check out our CAPM article. If it is higher, you can choose a stock with a BETA greater than 1.

My standard answer has been that negative beta stocks are a theoretical possibility but possibly non existent in practice. Every time I have found a negative beta in practice, there was either a data error or the sample size was too small for the negative beta to be statistically significant. I would also often joke that a bankruptcy law firm would possibly have a negative beta, but fortunately or unfortunately, such firms are typically not listed. While a Zero-beta Portfolio may not seem very lucrative to investors looking for greater returns, they can offer security and stability in terms of no risks and assured returns. Since it is effectively equivalent in value to the risk-free rate of returns, the returns with this portfolio will below. Zero exposure to market movements ensures the lowest possible volatility but also erases the chances of benefitting from any possible market value upswings.

Beta Indicator

The difference in performance between two different types of investment instruments is not captured by alpha values. For instance, using Alpha values to compare the outperformance of an can beta be negative equities exchange-traded fund with a fixed income benchmark is not possible. As a result, it should only be used to evaluate the performances of two instruments with comparable designs.

  • The Beta coefficient is used to measure how risky an asset is.
  • For many patients, second cycles are often easier than the first.
  • As we see the beta formula in the coming sections, it will help you better understand the beta meaning.
  • Furthermore, beta is calculated by the historical movements displayed by the stock, therefore, it cannot be used for future valuations.

These assets with negative Beta also have a role to play in your investment portfolio. On the other hand, investors with low-risk tolerance can opt for stocks whose beta is less than one. Usually, instruments not directly affected by stock market movements and offers fixed returns have a beta value lower than one. Negative beta indicates that the security will move on opposite direction in which market moves. But assets like gold may have negative beta as gold is seen as an alternate investment when market falls.

These are some of the questions that this article delves into. However, for investors to choose stocks that match their risk appetite is tricky. For example, a high-risk investor who has diversified within asset classes may want to invest in high-risk stocks as they can offer higher returns. On the other hand, an investor who is just starting in the market may want to invest in less risky stocks even though they may offer lower profits. Most of the high growth and quality stocks are now ‘priced to perfection’ leaving scope for potential re-rating in value stocks.

What is beta in stock?

In investing, alpha compares performance to relevant market benchmarks using a variety of metrics. If a company is in a downtrend for a few months and the beta is very high then it may be able to have a positive impact but most probably not. Looking at the other picture if the beta is low then it will not be even able to make profits in the bull market either thereby justifying that beta cannot be solely considered. Furthermore, beta is calculated by the historical movements displayed by the stock, therefore, it cannot be used for future valuations.

can beta be negative

Also, these securities act as a hedge against market fluctuations or crash. Please read the scheme information and other related documents carefully before investing. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs.

As can be seen, all the three banks have been more volatile than Nifty and have moved in the same direction as the Nifty. Among the three, ICICI has been the most volatile while HDFC bank has been the least volatile. See that beta can be compared across securities because it is a standardized measure. Now that we understand beta and how to interpret it, let us move ahead and talk about the importance of beta. To calculate understand Beta, you need to account for the fund’s current returns and that of the reference benchmark index and risk-free return. If you are interested in measuring Beta, you must use the correct benchmark to generate Beta for the fund.

A beta of 1.0 indicates that the stock has same risk as that of market i.e., if the market rises by 1%, then price of the stock also increases by 1%. For example, Reliance Industries has a long-term beta of 1.03 which indicates the stock will move in line with market. This is to inform that, many instances were reported by general public where fraudsters are cheating general public by misusing our brand name Motilal Oswal. Though we have filed complaint with police for the safety of your money we request you to not fall prey to such fraudsters.

What Is Beta In Stock Market – 2022 Guide On Examples, Formula And More

Although we can talk about beta in respect of other financial assets, say, bonds, it is easier to understand this concept in respect of stocks. Beta is a measure of market risk, which cannot be reduced by diversification. In other words, it is that part of the return from the portfolio that’s attributable to the broader market and not the fund manager or investors’ skill. Alpha is a measure of outperformance of a fund given its Beta. Both are part of the total return or total risk of any investment portfolio, and hence, both are needed to be considered for any effective investment. An investor can use beta in planning their mutual fund selection to determine volatility of the fund/scheme and to compare its sensitivity in movement to the overall market.

A look at the price change percentage of the Nifty High Beta 50 , the Nifty 500 and the Nifty 50 across various durations throws up the numbers below. A look at the components of the Nifty High Beta 50 (one of NSE’s strategy indices, that aims to measure the performance of high beta stocks that are listed on NSE) also supports this. A high-beta stock can therefore rally much higher than the index, but then falls much more steeply during corrections. High beta stocks are therefore stocks with volatility greater than the market or the index.

However, BETA doesn’t clarify this difference, making sense in theory but not in practice. High beta stocks are considered to be riskier but usually have high return potential, while low beta stocks pose less risk. History suggests that high beta stocks outperform in a bulls market, but data suggests that the top wealth creators are low beta stocks if we compare the YTD or year-to-date performance. Keep in mind that each statistic is based on the past performance of security when employing alpha or beta in your strategy. Therefore, neither metric can forecast how a stock or fund will move in the future.