The value beta portrays the volatility of an individual ...
Beta
A Statistical Analysis of a Stock’s Volatility
Courtney Wahlstrom
Iowa State University, Master of School Mathematics
Creative Component
Fall 2008
Amy Froelich, Major Professor
Heather Bolles, Committee Member
Travis Sapp, Committee Member
Beta: A Statistical Analysis of a Stock’s Volatility
With recent economic uncertainty, discussion of the volatility of the stock market is unavoidable. Describing the current market, finance professor at New York University Robert Engle stated, "We have no idea where things are going. That is what high volatility means,” (Merle, 2008). The value β portrays the volatility of an individual stock compared to the market as a whole, usually represented by the S&P500. This β paints a picture of how much an investor can expect a particular stock to increase or decrease in price compared to the movement of the market as a whole. A high β value does not mean that a stock is expected to increase in value; it means that it is much more volatile (likely to increase or decrease at higher rates) than the market as a whole. Therefore, if the market rises, one would expect a stock with a high β to rise at a higher rate. Likewise, if the market falls, a stock with a high β should fall at a higher rate as well. On the contrary, a stock with a relatively small β value maintains a much steadier price over time than the market. This can be summarized in the following chart describing the potential values of β for any given stock:
Table 1. Summary of Values of beta and the relationship to market movements.
|β ................
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