4 ms·

I'm not sure your description of Beta is accurate. Correctly if I'm wrong, but Beta is a measure of volatility in correlation with the broader market, not a me

by lee 13y ago

I'm not sure your description of Beta is accurate. Correctly if I'm wrong, but Beta is a measure of volatility in correlation with the broader market, not a measure of volatility in of itself. There are plenty of stocks that have beta < 1 that are much more volatile than the indexes. Having a low beta simply means its price isn't as correlated with the overall market. An example, Netflix has a beta < 1 but is extremely volatile.

sz4kerto 13y ago
Correct. However, beta<1 still means that the company's outlook and success does not depend that much on the state of the economy, for example.
mathattack 13y ago
You are correct in your definition. I thought that's how I explained it. Beta is volatility relative to the entire market. That's why I said "less volatile to market conditions than an index fund" Basically if the market has a big day, it will move up less than the whole market. Similarly on a down day. I think for both Netflix and Microsoft it's because they have strong brands and recurring revenue streams. They are also less dependent on external funding, so whether the market goes up or down has little impact on their P&L. The converse, which you pointed out, is that they are highly impacted by non-market risks, which is very big, especially in the case of Netflix. There is a lot of discounting of future cashflows, so if something small happens (like splitting off the CDs business) then it creates a lot of volatility. I think we're on the same page, no? Should I edit the original to be more precise?
- bornhuetter 13y ago
  Your definition and use of the term are correct.
n00b101 13y ago
If S is the stock return and M is the market return, then Beta = cor(S,M)*vol(S)/vol(M) Where cor(A,B) is correlation between A and B, and vol(X) is volatility of X (i.e. standard deviation).

4 ms·

I'm not sure your description of Beta is accurate. Correctly if I'm wrong, but Beta is a measure of volatility in correlation with the broader market, not a me

by lee 13y ago

sz4kerto 13y ago
Correct. However, beta<1 still means that the company's outlook and success does not depend that much on the state of the economy, for example.
mathattack 13y ago
You are correct in your definition. I thought that's how I explained it. Beta is volatility relative to the entire market. That's why I said "less volatile to market conditions than an index fund" Basically if the market has a big day, it will move up less than the whole market. Similarly on a down day. I think for both Netflix and Microsoft it's because they have strong brands and recurring revenue streams. They are also less dependent on external funding, so whether the market goes up or down has little impact on their P&L. The converse, which you pointed out, is that they are highly impacted by non-market risks, which is very big, especially in the case of Netflix. There is a lot of discounting of future cashflows, so if something small happens (like splitting off the CDs business) then it creates a lot of volatility. I think we're on the same page, no? Should I edit the original to be more precise?
- bornhuetter 13y ago
  Your definition and use of the term are correct.
n00b101 13y ago
If S is the stock return and M is the market return, then Beta = cor(S,M)*vol(S)/vol(M) Where cor(A,B) is correlation between A and B, and vol(X) is volatility of X (i.e. standard deviation).