Can an investor outperform the market with a portfolio having a beta less than one?
Posted by admin in Finance Wednesday, 7 December 2011 12:44 4 Comments
If you think its possible, how?
Why wouldn’t it be possible?
Posted by admin in Finance Wednesday, 7 December 2011 12:44 4 Comments
If you think its possible, how?
Why wouldn’t it be possible?
If the market’s in a nose dive, your portolio value will take a dive as well. But whether it will be as sharp a drop is not easy to predict, simply because some groups of stocks will fare better or worse than others, no matter what the beta (measure of volatility).
Yes it’s possible and I’ve seen some research online that proves it (can’t remember the link now). More beta just adds volatility without adding return. The reason is some high-beta stocks go to $0, that really screws up the average return.
In a down market, any portfolio with beta less than one will beat the market, by definition.
Oh course it will depend on the particular stocks in the portfolio.
The 1.0 beta stocks are down about 38.5% so far during the past 52 weeks.
There are actually 74 stocks with a beta of less than 0.2 and a market cap of greater than 500 million that have a 52 week return of much better than that. The worst return on the list is Zion Bankshares down 16%. The best is Cathay General CATY up 30% another back stock. I guess all bank stocks are not in the crapper.
But of course 52 weeks does not a long term history make.
Let’s check out the 10 year return record of some of these low beta stocks compared to the S&P 500 with its beta of 1.01
SPY 10 year annual return 0.32% our benchmark
CATY 10 year annual return 10.4%
ZION -1.4% perhaps the worst of the bunch.
DNA has not been around 10 years. The 5 year return is 14.5%
FDO 4.9%
LG 12.3%
ABT 4.5%
APOL 16.7%
But I know what you are thinking. I picked just the ones that have performed significantly better than the 1.0 beta average. That is true. But you did ask if it were possible. I think this proves that it is.
Of course hind sight is much better than fore site.
So how many 0.2 beta stocks have performed worse over the last 52 weeks? Only 7. That is all. 3 of those are preferred stocks that are closely related to 2 of the common stocks with low betas that also crapped out. NCC and WB. So really there are actually only 4 different companyies: NCC, WB, CPN, and FDML .
What is that old saying about a few rotten apples in every basket?