During times of high market volatility, investors may typically ask, “what kind of strategy should I follow?” or “which stocks should I be buying and selling”? Using the concept of statistical regression between individual stock and market returns, we can begin thinking about these questions using the concept of “Beta” from the Capital Asset Pricing Model (CAPM).
Beta is a measure of the sensitivity of individual stock returns to market returns. A stock like HK2800 (Tracker Fund) would have a beta close to 1. A Beta significantly higher than 1 indicates that a stock may rise or fall more sharply than the market index. A Beta significantly less than 1 indicates that the individual stock returns do not move in the same direction as how the market moves.
Top 5 High Beta stocks:
For high Beta stocks, if an investor had a view that the market is trending upwards in the short term, buying high beta stocks may lead to higher gains. But under the current highly volatile environment, investors may be better off simply to avoid high beta exposure, as these are the names that may drop more significantly than the market. What is also notable is that in the high beta list, China property developers tend to show up further down the list of top 50 high beta names.
Top 5 Low Beta stocks:
Under the current highly volatile environment, investors may be better off to have low Beta exposure as a cornerstone security to build a defensive portfolio. As always, comments and feedback are welcome!