Online Financial Information: Trust But Verify!

by: Konstantin Voronin

The first was never to accept anything for true which I did not clearly know to be such; that is to say, carefully to avoid precipitancy and prejudice, and to comprise nothing more in my judgment than what was presented to my mind so clearly and distinctly as to exclude all ground of doubt. --Rene Descartes

According to Moore's Law, the number of transistors per square inch on an integrated chip doubles every month, which means that the cost of data communication and data storage is becoming very close to zero. In fact, the ratio of price to performance of computers has fallen from something like $4,000 for a standard computing device to something around a penny for that same computing device. [1]

Recent technological advances have helped to increase the efficiency of the global financial market. Computers and telecommunication system are available to all participants of the market. Thus even people who are just learning how to invest in financial assets have constant access to the most up-to-date financial information. Many investors use online sources of financial data to evaluate risk and return profile of their portfolios. [2]

There are number of great websites offering real-time market information for free. Most of them doing a great job providing vital individual stock and overall market statistics seven days a week. If you ask me or any of my finance classmates where we go to get stock prices when we needed them, the answer will be Yahoo Finance because it's a quite reliable and easy-to-use tool available on the Internet.

However no matter how good some sources are, nothing is perfect and it wouldn't be a prudent choice to accept all the information you get without questioning its validity. One day, I was looking at the key statistics of Merck & Co, Inc. (NYSE:MRK) stock on Yahoo! Finance and and I noticed that there were variations in the data. For example, Yahoo reported Merck's beta as 0.3 while TD Ameritrade estimated it at 0.7.



Since I was interested in this particular stock at the moment, I decided to run my own calculations to find the correct value. I compared historical stock prices to the prices of S&P 500 over the same period of time. Then I used covariance function to calculate my own beta.

Click to enlarge

As you can see from the image above, my beta was around 0.66 which is much closer to the TD Ameritrade's value. The variations between our two value may be caused by slightly different time horizons. I used historical prices over the past 17 years while TD Ameritrade, I assume, used the complete price statistics from the day of company's IPO.
In this particular case, the differences in betas may help me to prove my point which is there is no such thing as "one size fits all." I don't know how Capital IQ calculated Merck's beta for Yahoo Finance, but I'm sure that their figures are not wrong. They must have used different inputs in their equation. I mentioned two parameters that I used for my calculations - 17 year time horizon and S&P 500 as a bench mark. However, in your own analysis you should always keep in mind specifics of your asset and how long you're going to keep it.

It definitely takes more time to run own calculations than just look up information online. But it's always better safe than sorry.

1. Kronke, David. "The Importance of MIS." Using MIS. Upper Saddle River: Pearson Education, Inc, 2011. 1-29

2. Fabozzi, Modigliani, and Jones. "Globalization of Financial Markets." Foundations of Financial Markets and Institutions. Boston, MA. Pearson Education, Inc, 2010. 7-8

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.