What is Negative Beta?
what industries, products, etc have negative betas? i know gold is one, but what else and why?
Can Beta Be Negative?
Yes, beta can be negative.
As defined by the WSO Finance Dictionary:
Beta shows the performance of an asset relative to the market, i.e. an asset with a beta of 2 will always perform double that of the market (10% market rise = 20% asset rise, 5% market fall = 10% asset fall).
Therefore, if a stock always falls 10% while the market is rising 10% a company would have a negative beta of 1 because it falls by the same amount that the market rises.
Check out a video of how to interpret beta below.
Negative Beta Stocks and Industries
Gold is the most widely used example as something with negative beta. Gold has an inverse relationship with the market. When markets are in turmoil, investors (at least in theory) turn to gold.
User @smuguy97", a private equity associate, shared some examples of industries with negative betas:
Industries that have negative betas demonstrate counter cyclical movements with the market as a whole. On a basic level, try to think about industries or subsegments that would benefit from a broad deterioration in the economy.
A couple examples:
- Bankruptcy advisory services - this one is pretty obvious, a weaker economy = more bankruptcies
- Career colleges / trade schools - when unemployment is high, people without jobs go back to school
- Gold is actually a bit different, but broadly speaking, the price of gold increases in times of financial duress because this is when capital moves out of riskier investments (e.g., junk bonds), thus depressing their prices, and into higher quality investments (e.g., gold).
Read More About Beta on WSO
- Where To Find A Stock's Beta?
- Intuitive Explanation Of The Levered Beta Formula
- Difference Between Asset Beta And Equity Beta Formula
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