Beta

Abstract

Beta quantifies the expected volatility of an asset as it relates to the volatility of an index with which it is compared (usually the S&P 500). While this is important information about the behavior of an asset, equally important is whether the asset can be expected to move, over time, in the same direction as the index. Beta gives no information about the trend of an asset with respect to the trend of the index. In fact, calculation of beta explicitly removes the trend, so has no dependency on it. The author gives examples of an asset that is trending up with the index but has a beta of -1.0 and an asset that is trending down but has a beta of +1.0, and then shows how to calculate a price sensitivity that relates the trend of an asset to the trend of the index. Combining beta and price sensitivity gives a much better picture of the expected investment characteristics.