Active Value Investing by Vitaliy N. Katsenelson

Author:Vitaliy N. Katsenelson
Language: eng
Format: epub
Publisher: Wiley
Published: 2012-05-15T16:00:00+00:00

However, the reality of real-world investing is much different from theory. Let’s take beta for instance. Beta on the individual security level has a lot of noise that makes it often an irrelevant (random) as a measure of risk and a predictor of returns. Often it represents just a coincidence in time. Beta speaks of the past but is mute about the future. It is unstable and can move up or down by a large amount in months, where the risk of underlying company has not changed at all.

Looking at Exhibit 7.6, historical beta for Wal-Mart, we see that it was as high as 0.99 in March 2002 and declined to as low as 0.40 in March 2005. The company risk profile has not changed much, whereas beta’s decline of almost 60 percent would tell us that the stock became 60 percent less risky during that time frame.

EXHIBIT 7.6 Wal-Mart Historical Beta

Data Source: Standard & Poor’s Compustat.

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