What's a stock that has a low beta but high volatility
Seems like a bit of a trick question because beta is a measure of volatility to the market - so essentially the market itself would have to be volatile?
I was thinking something like coca cola might be a good response? moves generally in-line with the market and market overall has been volatile...?
Thoughts?
i may be wrong but if this was asked in an interview and i was under time pressure, i'd say iutilities or a sector that has exposure to commodities. low beta in the sense that it provides recurring service to the economy and will always be in demand regardless of cycle. high volatility because heavily dependent on commodity prices and political factors.
Interesting take on utilities and commodities, but commodities don't always reflect the market i.e. gold has a negative beta. But believe you meant answering like a power company? I could see this working as it would broadly move in-line with the market, but the natural gas to supply that power is extremely volatile.
Yes I did not mean gold when I said commodities. I was more broadly referring to power, gas, oil etc
I was going to say gold stocks. Low/negative beta and volatile.
Most other commodities (gas, oil, etc.) would likely be high beta/high volatility. High beta because they would have higher correlation to economic activity and volatile.
Utilities have some of the lowest betas - their returns are often regulated and they would seek to reduce/eliminate exposure to commodity prices.
Interesting take, not sure I agree. The question is a low beta so moves broadly in-line with the market, but gold is the classic example of a negative beta i.e. not correlated at all - while I do agree it's volatile.
Agree commodities themselves are not a good answer because they would be all over the place, although in theory they should be correlated.
Utilities would be one of the best answers then, no? Generally a low beta, but still volatile due to commodity inputs?
Maybe I was interpreting this in a bit too literal of a sense, but isn't a negative number low? If you mean a low, but positive beta, yes I would tend to agree that gold might not qualify because it could be zero or negative beta.
I would disagree, utilities are not a good answer. They are generally both low beta and low volatility. As per Damordan, utilities have some of the lowest betas and lowest volatility.
http://pages.stern.nyu.edu/~adamodar/
I’ve seen plenty of REITS that have swung pretty hard but have Betas technically below like 0.6. Feel like it’s mostly due to lower correlation - real estate itself is considered another asset class outside of public markets.
This is how I would go about it (could be wrong): Talking about beta is out of the question since a stock with a low beta (all else equal) doesn't move with the market, therefore it's not a volatile stock. I would answer a stock with very high trading volume would be a volatile stock even if it's beta is low because should a positive or negative external event (e.g. tornado wipes out retail stores that contribute a large % of total revenue) and internal event (e.g. as simple as missing consensus by a material amount or a contract of a major client expires and they're not renewing) occur, then extremely high trading volume would move the stock price up or down. Thoughts?
beta as calculated by regression for the airlines over a 5yr timeline would be far lower than their current 6m beta for obvious reasons. So I guess it would then come down to what the beta should be moving forward - maybe we expect the beta moving forward to be far lower than recent just due to the recent events like you said.
Good answer, I didn't think about it that way. I guess stocks operating in industries at the moment that aren't impacted both negatively or positively by external factors (having a low beta) could expect a high beta should any external events occur that would impact the industry in which their operating in. Does the question address current volatility or expected future volatility? Your explanation would satisfy the question if it's addressing expected future volatility. Am I over thinking it?
I have seen questions like this before: the typical answer is a biotech company that has no current drugs approved but is pending one through an FDA process. These companies are very small and have little to no correlation with the general market (politics, GDP, unemployment, etc.)- therefore low beta
However, they are EXTREMELY volatile (high standard deviation) due to the contingent success of the drug's approval by the FDA- when it does get approved, the stock will explode in price, and if there are negative developments the stock will collapse, hence the volatility.
Hope this helps
That's a good answer. I would think that other highly speculative stocks with a binary/non-market correlated event like this would also have a similar pattern (e.g., early stage oil or mining exploration company where a significant find would influence the price positively or negatively in a material way).
Exactly, I think you could make an argument with the oil exploration company with the only caveat being that oil prices influence the economy and therefore there would be some correlation with that so it would be a beta somewhat closer to 1, but still makes sense if its a 0 or 1 scenario with 1 being oil and a large payout.
Right on 2/3 counts. Biotech has low correlation, high sd, high beta.
For the interested:
Rolling Correlation, SD, Beta
Think that the simple answer to this question is a stock that just never/barely gets traded.
Assume its a very small company which is of no interest to investors, probably has no ER coverage, etc.
It could potentially be super volatile since trades can have massive price differences but it will most likely have a beta of 0 or a non-meaningful one cause it wont get sold/bought during shocks like corona/crises.
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