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Technology Stocks : Internet Analysis - Discussion

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To: Reginald Middleton who wrote (128)	2/8/1999 12:26:00 PM
From: Chuzzlewit	Read Replies (1) of 419

Reginald, I come back to Apratim's observation that we are dealing, in part, with a semantic problem. I think that risk is best defined in terms of the possible consequences of expectations not being met. Traditional theorists tell us that there are two kinds of risk: business risk (which is diversifiable) and market risk which is not diversifiable (but is manageable). While the former risk traditionally consists of issues like losing a major contract or a factory burning down or a strike, it also consists of the possibility that expected growth may not materialize. Look at what happened to CIEN shares after T pulled the plug on their products as an example of this. Market risk consists of the general outlook for the equity markets, and is closely tied to issues like Brazilian economic woes, and long-term interest rates. These are generalized concerns that affect all businesses to some degree, and this is the kind of risk that beta measures. I think the point that you are overlooking is the fact that the residuals are normally distributed, which means that volatility and risk are one and the same. You said that Excluding the last year or two (or three), MSFT has a lower beta and volatility than the S&P 500, although it has trounced it in return over the same period. You are incorrect at least as far as beta (I don't know what the volatility numbers are). The S&P500 has a beta of 1.00 (by definition) and MSFT has a beta well in excess of 1.00. The way you measure beta is to regress the market's periodic rate of return against the stock's periodic rate of return -- not the S&P index against the stock price. When you do this you exclude sudden jolts to the stock price as a result of diversifiable risk (like the effects of the DOJ suit against MSFT). TTFN, CTC

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