Question

. An analyst in a daily business segment broadcasted on the national TV quoted the following statement:                                                                                                                           

“Looking at the historical market prices of AB and CD stocks, we find that AB have been on an average traded at Rs. 120 for last three years, indicating low beta because its price moved very little. On the other hand, CD stock showed that it has been traded at a high of Rs. 1050 and a low of Rs. 550 (its current market price) during the same time period as stock AB. Thus, CD stock has shown large variation in terms of its stock prices indicating a high beta.” Do you agree with his statement? Explain

Answer 1

I don't agree with this statement because the higher deviation in the stock price of a stock is related to standard deviation of a stock and it is not the beta of a stock because because beta is the measure of the volatility of the stock.

When the volatility of a stock in respect of the index is lower than index, then this stock is said to be low beta, but in this case there is a stability in deviation of stock prices from the average mean and the prices are stable in nature, so this could be said to be lower standard deviation from the 3 year historical mean in case of Stock AB.

In case of stock CD, it can be said that there is higher standard deviation of the stock from the historical mean because stock has shown greater deviations from the average in last three years.

If deviation has to be taken from the angle of fluctuations,then one can even take these stocks for high beta or low beta stocks because stock CD is highly fluctuating in nature so it may have high beta whereas stock AB has low fluctuations in nature so it may have low beta, but in this question the standard deviation is more appropriately mentioned by the analyst rather than volatility .