Market Volatility and Equity Betas

In late 2008, the market experienced its most volatile 50-day period ever. At one point, the average daily move of the S&P 500 over the prior 50 days was +/-4%! While volatility is still very high, it has nearly been cut in half from its peak in late 2008. As shown below, the average daily change for the S&P 500 over the last 50 days has been +/-2.07%.

click to enlarge

Below we highlight the most and least volatile stocks in the S&P 500 based on their betas. A stock with a beta of 1 will move inline with the overall market. A stock with a beta of 1.5 is theoretically 50% more volatile than the market. During a rising market, investors look for high beta stocks in hopes of outperforming the indices. In a declining market, low beta stocks become attractive because they theoretically won't decline as much.

As shown below, Citigroup (C) has the highest beta in the S&P 500 at 2.58. Most stocks on the high beta list are financials and other struggling companies with low share prices. These stocks have gotten hit harder than most stocks on the way down, but they have also risen significantly during the bear market rallies.

The stocks with the lowest betas are mostly defensive in nature, and they can be counted on to not be nearly as volatile to the downside when the market is headed lower. On the other hand, they won't be names to get long for investors looking to gain back all their losses from the past two years.

Comments

[morph366:]

Over what period of time are the beta values being measured?
A number of studies have shown that the beta value is itself rather unstable and tends to move higher when the overall market is more volatile and then eventually revert back towards a more typical or longer term mean beta value.

Apr 02 08:29 AM