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Technology Stocks : Internet Analysis - Discussion
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To: Reginald Middleton who wrote (123)2/7/1999 8:39:00 PM
From: Chuzzlewit  Read Replies (1) of 419
 
It seems to me that the idea of using the implied volatility on LEAPS may work out quite well. For example, MSFT is in litigation right now the the government. What happens if one side prevails? I'd bet (although I don't know because I don't follow MSFT) that the uncertainty has pushed up the implied volatility recently, and once the outcome of the trial is know, that the implied volatility settles back down. What I find especially appealing about this idea is that it is forward looking while betas are derived from historical data and do not reflect changes in investors' attitudes going forward.

But more to the point, can you give us a quick idea of precisely what you mean by risk? In the usual academic sense, risk is the probability that a certain event will not occur, so by extension, standard deviation is a good surrogate ceteris paribus. Unfortunately, that condition rarely holds -- especially in technology issues.

As I recall, there was a suggestion in Malkiel's book that instead of using betas to measure risk, a better method might be to measure the standard deviation of analysts' forecasts. This too has the advantage of being forward-looking but its time frame may be too short.

TTFN,
CTC
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