risk management

BETA: Upside Downside

j3

14/04/2016

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The Beta of a stock indicates the movement relationship between the Stock and “the market”.  A beta less than 1 indicates that the Stock is less volatile than the market, while a beta more than 1 the contrary.

How is it calculated?

If we plot the daily/weekly/monthly returns of the Stock versus the daily/weekly/monthly returns of the market, the slope of the best fitting regression line is Beta. In the picture below, Volkswagen AG  has 0.9558, which means that when the EuroStoxx50 goes up  1% the company rise 0.96%. Beta And if the EuroStoxx50 goes down 1%?

Then maybe Volkswagen AG  drops down a little bit less.
Here, I separate the weekly returns between the positives and the negatives. And I calculate the same slope as before:

beta upsidebeta downside

 

 

 

So when the market goes down, Volkswagen AG loses more than the market and when the market rise, Volkswagen AG gains more…

I have calculated the Beta and the Up/Down side Beta for some of the most important European-Car-Manufactures companiesTable beta

Finally, I have developed a strategy with these 6 Stocks:

First, a 100-day moving average of the price tells me if the market is going up or down.

Blue curve:

  • When market up, I buy the Stock with the lowest 2-year-back Upside beta.
  • When market down, I buy the Stock with the highest 2-year-back Downside beta.

Red curve:

  • When market up, I buy the Stock with the lowest 2-year-back beta.
  • When market down, I buy the Stock with the highest 2-year-back beta.

Green curve:

  • Equally weighted

Strategy of cars

table of results

Beta

(Blog) Correlation and cointegration

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