# QUESTION ABOUT STOCKS-Beta **URL:** \ **Category:** Factual Questions\ **Created:** [January 14, 2000, 5:30pm UTC](https://boards.straightdope.com/t/question-about-stocks-beta/6152 "2000-01-14T17:30:00Z")\ **Posts on this page:** 7\ **Page:** 1
**Author:** ![egkelly](https://avatars.discourse-cdn.com/v4/letter/e/db5fbb/32.png) [@egkelly](https://boards.straightdope.com/u/egkelly)\ **Post date:** [January 14, 2000, 5:30pm UTC](https://boards.straightdope.com/t/question-about-stocks-beta/6152/1 "2000-01-14T17:30:00Z")
According to the CAPITAL ASSET PRICING Theory (Prof. Merton Miller of MIT), stocks should be priced according to how they move relative to the market as a whole. beta is a measure of this. Anyway, I just checked my portfolio, and my shares have beta ranging from -.67 to +1.85. My question: can you select a winning portfolio based on beta alone? If so, who needs analysts?-just pick high beta stocks, and hold them! What is the flaw in my reasoning? ---
**Author:** ![CatInHat](https://avatars.discourse-cdn.com/v4/letter/c/9d8465/32.png) [@CatInHat](https://boards.straightdope.com/u/CatInHat)\ **Post date:** [January 14, 2000, 5:43pm UTC](https://boards.straightdope.com/t/question-about-stocks-beta/6152/2 "2000-01-14T17:43:00Z")
According to [Morningstar](http://news.morningstar.com/news/ms/Investing101/riskybusiness3.html), > [@](#): > > beta measures the volatility of a security relative to something else, usually a benchmark index. The article goes into some detail, which I’ll leave as an exercise to the reader 😛 , but to summarize: a stock fund’s beta is usually measured against the S&P500. Such a fund with a beta of 1.1 would gain 11% for every increase of 10% in the S&P500, but **it will also lose 11% for every decrease of 10% in the S&P500**. On the face of it, your reasoning is OK, assuming the stock market continues to rise (which it probably will, long-term). Just be sure that you understand your statistics. Morningstar on the web has some really good educational resources. * * * Never attribute to malice anything that can be attributed to stupidity. – Unknown ---
**Author:** ![curious\_george](https://avatars.discourse-cdn.com/v4/letter/c/b487fb/32.png) [@curious\_george](https://boards.straightdope.com/u/curious_george)\ **Post date:** [January 14, 2000, 5:49pm UTC](https://boards.straightdope.com/t/question-about-stocks-beta/6152/3 "2000-01-14T17:49:00Z")
That’s what I thought. Beta measures the riskiness of an investment, relative to a benchmark. The higher the beta, the better it will do when the benchmark is increasing, but the worse it will do when the benchmark decreases. ---
**Author:** ![manhattan](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/manhattan/32/7_2.png) [@manhattan](https://boards.straightdope.com/u/manhattan)\ **Post date:** [January 15, 2000, 6:12am UTC](https://boards.straightdope.com/t/question-about-stocks-beta/6152/4 "2000-01-15T06:12:00Z")
Well, no. Beta measures how volatile a (stock, mutual fund, whatever) _has been_ relative to the comparative benchmark, not how it’s going to perform. High beta stocks as a group have tended to behave as you describe, but when one gets down to the single stock (or fund) level, things get more complicated. A stock that has gone only up will show a high beta relative to an index that has moved up and down. Unfortunately, a stock that’s gone only down will also show a high beta relative to the same index. ## I’ll pull out the Miller and give a better, longer discussion of beta in CAPM when I have a chance, probably this weekend. Livin’ on Tums, Vitamin E and Rogaine ---
**Author:** ![Scylla](https://avatars.discourse-cdn.com/v4/letter/s/a5b964/32.png) [@Scylla](https://boards.straightdope.com/u/Scylla)\ **Post date:** [January 14, 2000, 7:20pm UTC](https://boards.straightdope.com/t/question-about-stocks-beta/6152/5 "2000-01-14T19:20:00Z")
Manhattan is correct. Beta specifically measures only volitility (and only historical volitility at that.) If you picked a portfolio of high volatility stocks, all you could reasonably expect would be a great deal of fluctuation, and this only as compared to the underlying index from which you derive your Beta. ---
**Author:** ![egkelly](https://avatars.discourse-cdn.com/v4/letter/e/db5fbb/32.png) [@egkelly](https://boards.straightdope.com/u/egkelly)\ **Post date:** [January 14, 2000, 7:25pm UTC](https://boards.straightdope.com/t/question-about-stocks-beta/6152/6 "2000-01-14T19:25:00Z")
What about the stocks that show negative beta? Is it possible to construct a picking strategy for these? Wouldn’t a negative beta portfolio be a good one to short? ---
**Author:** ![Scylla](https://avatars.discourse-cdn.com/v4/letter/s/a5b964/32.png) [@Scylla](https://boards.straightdope.com/u/Scylla)\ **Post date:** [January 14, 2000, 11:37pm UTC](https://boards.straightdope.com/t/question-about-stocks-beta/6152/7 "2000-01-14T23:37:00Z")
No: Beta measures volatility, not perfomance. A short portfolio of low beta stock is not likely to change in value very much. You lose on the margin interest.