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People outside the finance world seem to think beta is the same thing as standard deviation, and forget about the market correlation factor. I think the natura
by johnrob 15y ago
People outside the finance world seem to think beta is the same thing as standard deviation, and forget about the market correlation factor. I think the natural conclusion goes like: beta ~= risk ~= potential reward. It's hard to remember the bit where the ups/downs correlate with the market.
- joshu 15y agoCould be. I do get the sense a lot of people here learned everything they know from blog posts, unfortunately. For the rest: beta is defined as correlation to the market. Sigma is standard deviation of returns and also called risk.
- Alex3917 15y agoI probably used the wrong term. What I meant is that for small cap stocks, there is a very high rate of return over a 20+ year timespan, but in any given year there is a lot of uncertainty. Venture capital strikes me as being similar in that sense.
- joshu 15y ago(also called risk, or volatility. oops.)
- joncooper 15y agoThe most common way I've heard the term used is to mean correlation to "the market", meaning "the set of things that you can invest in". A high beta asset goes up more than everything else when "markets" do well, and a low beta asset less so. It is common in a multi-asset-class trading environment to make a grab for beta when the belief is that the short term trend for markets is good. Like when there is unexpected positive news flow about the global economy. "Buy some beta!" My guess is that VC returns are dominated by IPO exits, and IPO exits need institutional and retail demand for equities, which tends to happen in up markets. To the extent that VC returns are directional with the state of capital markets broadly, it seems like calling it a high-beta strategy is reasonable.