1. Discussion of Beta
What is beta and how can we use it to analyze a stock. Before I analyze my quantitative data from my excel I’m going to discuss Beta in general. For my discussion of beta I will be using 3 examples of stocks that each have a different beta. Apple (AAPL) with a beta of .93, fluctuates close to the overall market. Walmart (WMT) has a beta of .3 which will be the lowest of the group. The last stock I will be analyzing for my discussion of beta is SanDisk Corp. (SNDK) with 2.21. What is beta, what does it tell you about the stock? The number supposedly represents risk. There are some drawbacks with the number that I will discuss later on. Beta means how volatile are these stocks and how sensitive they are compared to the market. Do they move with the ...view middle of the document...
Low beta stocks such as Walmart will decline by .30 of a percent if the market declines by one percent. On the other hand if we had Sandisk with the beta being close to two it will move twice of that of the market. It sounds attractive because of the high return but can also be detrimental because it could go down also twice of the market. It depends on the individual and his or her risk tolerance.
Beta has different uses. Some use beta to predict a stocks return relative to the market. For example if the S&P 500 rose by 10% then we can predict the stock of say Sandisk (B = 2.21) will rise to 22.10%. Vice versa people can also estimate a stocks negative side if the stock market would be to fall by 10%. Second reason is to apply beta in cyclical cycles. When the market is in a bull run you would want high beta stocks and if the market is in a more bearish state you would want low beta stocks. The third use of beta is for a portfolio manager to manage the riskiness of a client’s portfolio. If the client is more susceptible to risk the manager might add in higher beta stocks and vice versa.
While the positives of beta can be nice there are some critisms of beta worth mentioning. Beta relies on historical data, looking backwards. The past isn’t necessarily a guide to the future. Secondly there are different ways to calculate beta. Why not look at 2yr, 4yr, or 10 yr historical data. The answer is there is no right answer. As a result a beta of one stock can be different from several research institutions. And lastly beta looks at the relative risk pertaining to the overall market and not at its sector. For example it might be more important to examine how Walmart is doing against other Big Box stores.
2. Quantitative analysis of Beta
For my research of beta I used the stock of Tesla which had a beta of 1.30. The market I used was the S&P 500. Tesla is figuratively more “volatile” than the market. The excel file attached shows the work of finding the Beta of Tesla.