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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Richard Gibbons who wrote (64473)	7/13/1999 3:28:00 PM
From: Knighty Tin	Read Replies (1) \| Respond to of 132070

Richard, Beta is the measure most used, though my formula uses both R2 and beta. But one problem I have with Modern Portfolio Theory is that there is a difference between volatility and risk. For example, MU is a volatile stock, but the co. may go bankrupt, so its risk is far beyond the beta measure, IMHO. In theory, if two cos are projected to give you the same dividend payout over the next 20 years, the one with the highest probability of delivering on that projection and the least probability of being down a lot at any given time until the 20 years is up, should have the higher price. In a manic market like this, the firms that deliver a set % of growth with the highest risk often have higher PE ratios. But that is a short term phenomenon. The problem with risk measures is that they are backward looking. I try to do my fundamental analysis so that I get some concept of risk going forward. For example, Compaq's past beta in no way reflected the risk in the stock or in the co. this year. Only solid fundamental analysis, which the tech bull camp cannot or will not do, would tell you that it was way overpriced given the risk factors. So, I would say knowing the risk factors, being able to quantify them in the formula, and then adjusting them as you receive new info or perception, is the way to go. But research simply no longer does that.