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Biotech / Medical : 2012 Biotech Charity Contest
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To: IRWIN JAMES FRANKEL who wrote (373)10/14/2012 3:51:15 PM
From: Biomaven1 Recommendation  Read Replies (1) of 513
 
>beta

For an individual stock, knowing the beta by itself is pretty meaningless. For example, if I tell you the beta of a stock is 1.0, most people think that means the stock moves in line with the market. But actually that stock could be pretty much uncorrelated with the market - it was just by chance that the regression line of stock price moves vs. market price moves had a best-fit slope of 1. Make a few small changes in the stock price and you might get a beta of 0 or -1. That's because the stock price moves in this particular case were basically uncorrelated with those of the market. To understand if the beta for some stock actually has any meaning, you need another number - R-squared. That tells you how much of the stock price moves are actually explained by the regression - R2=1 means perfectly explained and R2=0 means totally unexplained.

Once you start looking at a portfolio, then beta has more meaning because generally a portfolio of even biotech stocks will move with the market in a consistent manner. In general small cap stocks have a higher beta than large cap stocks, if only because they inherently have a higher volatility, not because they are more highly correlated.

For the competition, it would be somewhat meaningful to look at the beta of a single portfolio (or of the entire selection of all portfolios treated as one) compared with something like the Nasdaq biotech index.

Peter
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