perhaps beta has it's uses?
FWIW, Beta is at the heart of the Capital Asset Pricing Model (CAPM), where
Rate of Return = Risk-free Rate + Beta (Return from Market - Risk-free Rate)
There have been many criticisms of the model and the usefulness of Beta. Some of these are summed up in Burton Malkiel's A Random Walk Down Wall Street [See Chapter 9: "The Current State of the Art: Beyond Beta"]
Most of us probably remember from elementary statistics that in a "normal" distribution, 2/3 of the results tend to fall within one standard deviation of the mean and 95% fall within two standard deviations. But as Malkiel notes, this does not work as well for individual stocks as it does for a diversified portfolio.
At any rate, betas are very commonly discussed with stocks, e.g. in Yahoo Profiles, biz.yahoo.com, right up there near the top of the "Statistics at a Glance" - Price and Volume section. If your stock's beta is 2.0 and the S&P is up 1%, you should expect your stock to be up 2%, ceteris paribus.
It is sigma, standard deviation, which is very rarely mentioned with respect to stocks. Why this is so I do not know. Perhaps it is because of the ironclad relationship that low priced stocks will tend to have large relative sigma to higher priced stocks.
At any rate, by all means, question the utility of beta. But be sure to question the utility of sigma as well. |
