Stock Correlation & BETA


The beta (β) of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole (generally Indexes like Dow Jones or S&P). An asset with a beta of 0 means that its price is not at all correlated with the market. A positive beta means that the asset generally follows the market. A negative beta shows that the asset inversely follows the market; the asset generally decreases in value if the market goes up and vice-versa.

More specifically, a stock that has a beta of 2 follows the market in an overall decline or growth, but does so by a factor of 2; meaning when the market has an overall decline of 5% a stock with a beta of 2 will fall 10%. Betas can also be negative, meaning the stock moves in the opposite direction of the market: a stock with a beta of -3 would decline 15% when the market goes up 5% and conversely would climb 15% if the market fell by 5%.

Higher-beta stocks mean greater volatility and are therefore considered to be riskier, but are in turn supposed to provide a potential for higher returns; low-beta stocks pose less risk but also lower returns. In the same way a stock’s beta shows its relation to market shifts, it also is used as an indicator for required returns on investment (ROI).

Macroaxis Correlation Inspector goes step beyond conventional stock beta and finds correlations between the returns of each asset in the specified portfolio against every other asset it contains. By identifying how your stocks move each other you get crystal clear picture how diversified your portfolio is.

How Beta can help to calculate your Financial Adviser Performance?

It is relatively easy for an Adviser or  fund manager to create a portfolio that would go up twice as much as the S&P 500 when the S&P rose in value, but go down twice as much as the S&P when the S&P’s price fell – but such a portfolio would be considered to have pure Beta, and no alpha. A fund manager who is producing Alpha would have a portfolio that outperformed the S&P 500 in both good times and bad.