2 ms·
Return of a security = return due to correlation to the market + return due not due to correlation to the market. Rs = BRm + A It doesn't speak to general vol
by joshu 15y ago
Return of a security = return due to correlation to the market + return due not due to correlation to the market.
Rs = BRm + A
It doesn't speak to general volatility at all. The definition linked is inane; Beta of 2 only twice as volatile as the market if the security is highly correlated to the market.
Beta is literally cov(Rs, Rm) / var(Rm).
In this particular case, if he wanted returns highly correlated to beta he would just invest in VCs. To get a beta of 2 he'd leverage the funds somehow and invest that.
He thinks he has an edge, which is contained in alpha (return not captured by market performance.)
- byrneseyeview 15y agoI don't know. Still sounds to me like he's using the linked definition. Which I agree is not a useful concept. People do cite betas. e.g. here's a quote page for Yahoo, on a big personal finance site, that cites the "beta" as defined earlier: http://www.dailyfinance.com/quotes/yahoo-inc/yhoo/nas http://www.dailyfinance.com/quotes/yahoo-inc/yhoo/nas It's entirely possible for a typical investor to only encounter that version. Colloquially, if someone says "I like high-beta stocks," they mean "I like really volatile stocks," not "I like stocks that have some combination of high volatility and high correlation to some index." So the statement makes sense colloquially. A more accurate version would be "YC looks for a moderately negative beta and expects a very high alpha." Since that describes companies that fundamentally alter their target industries--e.g. by harming all the established players, but still making money.
- joshu 15y agoThe only time I've heard people talking about high beta has been in the context of leveraged securities that track the indexes. But what do I know, I only spent a decade on wall street.