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Is Positive Beta Better than Negative Beta?
A Beta factor represents risk in a financial instrument or commodity. Explain the reasons for changes in beta and explain if one should be more concerned with a negative versus positive factor. Be sure to reference volatility. Please provide an example of negative Beta.
Student Number #1 Response:
Beta is the measure of volatility or systematic risk of a security as compared to the whole market (Bates, Kidwell, Parrino, 2015). It is often used to calculate expected returns and beta that is less than 1 is less likely to be volatile while a beta over 1 will be more volatile than the market. An investor should be concerned with negative and positive factors of securities because this will determine how someone chooses to invest. A stock with a positive beta that is greater than one may be more volatile with higher risk but also offer higher returns, examples would be something like tech stocks as opposed to utilities stocks which usually have a beta of less than one and offer more stability but a lower rate of return.
A good example of negative beta would be bonds in a portfolio which has the characteristics of negative beta because it usually moves opposite of the market (Caplinger, 2012). By having bonds which provide negative beta in a portfolio like a 401k it kind of offers some protection against positive beta which because of their volatility can make and lose a lot of value. The bonds with negative beta can act as a counter balance insuring that even though there will not be a high return rate there will also not be huge losses.
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