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%. 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:
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 companies
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.
- 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.
- 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.
- Equally weighted