re: Stocks...

But its based on co-variance and standard deviation, both of which are two-sided.

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Beta Drawbacks
No matter how valuable betas may be, you should be careful when using them alone, since they may not provide you with accurate information. This is caused by a number of reasons. The first one is that beta calculations are made on the basis of past information. This means that they may not provide accurate predictions regarding the risk of the investment.

Additionally, beta lacks the consideration of major changes in the industry or sector, which may lead to inaccurate representation of risk levels. Finally, betas measure the volatility of stocks as compared to the whole market. However, this volatility may have a different direction. As a result a stock that is outperforming will have a bet of greater than 1 in a sustained advancing market.

Betas provide their benefits mostly in the short-term, when the movement of the price is of higher importance. Thus, you should consider the beta value if you are about to buy or sell a stock over a short period of time.

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LINK ][LINK]

From the beta king:

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Are there actual investments out there that have negative betas? I know that there are stocks with negative regression betas, but those are the mostly the result of something strange happening during the period of the regression - an extended lawsuit or acquisition battle throwing off the correlation with the market- rather the true betas. In fact, in my fifteen years of updating betas by sector, I have still not found a sector with a negative beta. Furthermore, even assets that, in theory, could have negative betas (gold, for instance) seem to have positive betas when securitized (gold shares, gold ETF). There seems to be something about the securitization process that makes real assets behave more like financial assets.

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LINK ][LINK]

Gold was actually the one thing I was thinking of that would have a negative Beta value, although it, too, appears to also have a positive value according to your source. What about an inverse ETF? Is that the only example that would work?

Summary of views:

1. My initial view: Betas close to 1 move in same direction as market. Betas far away from 1 are less likely to move in same direction, with those being far below 1 being less volatile than general market, and those being far above 1 being more volatile than general market.

2. Fizz's view: Beta is only determinative of volatility, not direction. Beta of 1 will be more likely to move by same percentage as general market. Beta far below 1 will move at a percentage less than the market moves, but in either direction. Beta far above 1 will move at a percentage greater than the market moves, but in either direction.

3. Wiki view: Any positive Beta value moves in same direction as market. Beta value of 2 moves in same direction as market, but twice as much. Beta value of .5 moves in same direction as market, but half as much. Beta value of -2 moves in opposite direction as market, but twice as much. Beta value of -.5 moves in opposite direction as market, but half as much.

And all three views have documentary support. Good idea for a thesis? I'm counting on you both, THF and fizz, to set the record straight.

Yeah, I'm not saying that a stock with a beta of 2 won't move in the same direction as the market, I'm just saying that beta doesn't explicitly tell you that. So it might, or it might not. As one of the quotes above mentioned, for short-term movements, it may very well do that on a regular basis. However, to see which direction a stock moves, you need correlation.

To wit:

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Investopedia explains Correlation
Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random.

In real life, perfectly correlated securities are rare, rather you will find securities with some degree of correlation.

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LINK ][LINK]

This question is going to Don Chance on Monday.

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So cliffnotes:

Correlation - how often the stock moves the same direction as the market

Beta - how similar the amount volatility is to the market

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That's my understanding.

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So a negative beta would indicate that when the market becomes more volatile the stock would become less volatile?

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Making my head hurt brah.

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This question is going to Don Chance on Monday.

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Yes, please ask him. I was about to email my professor, but I'd rather hear it from him. Beta is a pretty fundamental concept, and it appears that there is a lot of misunderstanding about what it actually does, which I'm ashamed to admit to be honest.

My remaining question is if beta is not tied to direction what is the role of negative beta. The fact that there's negative beta necessitates direction to be taken into account simply due to the fact that "opposite volatility" doesn't make sense.

I think the wiki view makes the most sense at this point:

Beta value of -2: asset moves twice as much as market but in opposite direction I.e. Double inverse ETF

Beta value of -1: asset moves just as much as market but in opposite direction I.e. Inverse ETF

Beta value of 0: asset is independent of market I.e. Real estate? Has it's own market but market in this context is stock not real estate

Beta value of 1: asset moves as much as market in same direction I.e. Bull ETF

Beta value of 2: asset moves twice as much as market in same direction I.e. Double bull ETF

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Let's double down and compare. I'll shoot an e mail over to him today.

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Will do.


ETA: Oh and thanks for helping me procrastinate for another hour. This entire weekend was a complete fail.