Beta, Measuring a Stock's Risk

The CBOE Volatility Index or VIX , the stock market’s gauge of investors’ fears, spiked above the 30 benchmark level for the 4th consecutive day, levels not seen since the Bear Stearns crisis that resulted in the buyout of the investment firm by JP Morgan Chase back in March 2008. The VIX which measures anticipated market volatility climbed on Thursday to an intraday high of 42.2. The last time the VIX closed above 40 was October 2002.

With financial stock shakeouts like that of Lehman Brothers , and government bail-outs of American International Group , Fannie Mae and Freddie Mac , investors may want to seek measures to calculate the risk associated with the prices of their individual stocks. A good financial ratio to use is Beta.

A stock's Beta measures the stock’s price volatility in relation to the overall market. The whole market, which for this purpose is considered the S&P 500 and is assigned a Beta of 1. Any individual stock with a Beta higher than 1 has greater price volatility than the rest of the market and tends to be more risky. Just because there is more risk, does not guarantee more reward. The average YTD return for the top quintile of S&P stocks with the highest betas is -25% while the average YTD return for the bottom quintile is -7%. In down markets, investors turn to low beta stocks for safety.

10 members of the S&P 500 with the highest Betas (per ThomsonReuters).

The data shows that the stocks carrying the highest Betas consist mostly of financial and housing stocks. CIT Group is the stock posting the greatest price volatility amongst the S&P 500 components with a Beta value of 3.02, implying that the stock is 202% more volatile than the S&P 500. CIT is also the eighth worst performer in the S&P year to date, as it has declined ~56%.

10 members of the S&P 500 with the lowest Betas (per ThomsonReuters).

The least volatile stocks, those with a Beta less than 1, consist predominantly of consumer staples and pharmaceutical stocks. Johnson & Johnson is the stock in the S&P 500 with the lowest Beta (0.36), implying that J&J’s stock price is 64% less volatile than the S&P.

The candy confectionery Wm. Wrigley is also amongst the S&P’s stocks with Beta values lower than 1, and is the eleventh best performer in the index year to date, gaining 36% for the year. A large part of this gain is due to its merger with Mars Inc.

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