What does BETA coefficient stands for and what does it indicate?

In a recent Intercapital Invest report, Andreea Gheorghe (photo), manager of the analysis department illustrates the importance of the BETA weight.

According to portfolio theory, the risk of any security consists of two components: the non-systematic risk, unique to a specific security, also called diversifiable risk and defined through the volatility of the security (standard deviation) and systematic risk (also called market risk or non-diversifiable) explained by BETA index.

“This risk is diversifiable because it decreases and tends to 0 value, given the portfolio diversification (by including more securities in the portfolio)”, she explained.

At Bucharest Stock Exchange the market indices used to calculate BETA weight can be BET or BET-C.

“Conventionally, the value of BETA coefficient for the stock market as a whole (for a portfolio which includes all securities listed) is 1,” reads the report.

Therefore, a security with a BETA weight at 1 indicates that the security’s price will move with the market. A value higher than 1 indicates that the security will be more volatile than the market – go up or down more than the market, Andreea Gheorghe explained.

In case BETA coefficient goes below 1, the price of the security will have a narrow-band volatility compared to the market. Negative values show the security will move opposite to the market – when the market goes down, the respective security will go up, and reversely.

“For example a security with 1.2 BETA, its price is 20% more volatile than the market index. A security with a 0.8 BETA, it is 20% less volatile than the market index. A security with a BETA close to 0 will not correlate to the market trend, and a negative BETA indicates the security will inversely follow the market index”, Intercapital Invest’s analyst explained.

An investor looking to protect the capital should go with a lower BETA coefficient, while an investor willing to take higher risks in a bid to get higher returns, should select securities with a higher BETA.

“The coefficient offers valuable indicators for investors in building their stock portfolios, by analyzing each risk profile. An investor with low risk aversion who expects the market will turn negative in the coming period, he would prefer to go on high-BETA security, as it would offer the possibility of greater returns than the rest of the market”, reads the analysis report.

FICs and financials – companies with the highest BETA weights

The coefficient should not be used individually, but together with other indicators of technical and fundamental analyses. Furthermore, investors should take into account the securities whose outlooks were changed.

“For example, SSIF Broker Cluj has the highest BETA weight in the market, namely 1.72. Normally, in the event of a stock market uptrend, the security should be a reliable target to traders, but the latter information on the company was negative and led to a change of approach in terms of fundamental growth potential”.

After BRK, financial investment companies and blue chips have high BETA weights; hence they are more volatile than the rest of the market and pose a higher risk, according to calculations of Intercapital Invest.

Impact has a 1.66 BETA, BIO – 1.53 and Oltchim – 1.45. All FICs are ranked as securities with the highest BETA, around 1.44 for FIC2 and FIC5, and 1.11 for FIC4. Banks are included in the same category, with BRD at 1.19, Banca Transilvania – 1.12. Banca Comerciala Carpatica has a moderate BETA coefficient of 0.85.






Source: Intercapital Invest