Question

Con-Agra is one of the world’s largest packaged foods companies. Take a look at it (google it): CAG (NYSE). What does the beta tell you about Con-Agra?

What is beta, how is it calculated, why is it relevant (or where it is not)? How relevant do you feel it is with respect to Con-Agra? What does it tell you about Con-Agra? Would your answer be different if the question was not about Con-Agra but instead, was about Lyft (LYFT) (NASDAQ)? What kinds of risks are there with respect to Con-Agra (in terms of systematic and non-systematic risk)? What kinds of risks are there with respect to Lyft (in term of systematic and non-systematic risk) that makes it different from Con-Agra? With that in mind, do you think the beta is a good reflection or not to invest in Con-Agra or Lyft? You can address this in the context of the Efficient Market Hypothesis if you want. Anything else worry you (or not) about Con-Agra or Lyft? (Finance related factors)

Answer 1

Beta is a measure of the volatility of a security compared to broader market. It means for example if beta of a company is 2. Then if market moves up by 100 points, the company will react 2 times in a positive way. It means the stock of company will move upward by 2 times of percentage increase of market. It is a systematic risk.

Beta of a company is calculated using covariance of the return of an asset with return of the benchmark divided by variance of the return of the benchmark over a certain period.

In simple terms, beta is calculated by taking past returns of both the companies and market returns. Subtract risk free returns from all the returns (2 companies and market returns). When you express company return as a percentage of market return and take an average over a period of time, you will understand how the stock changes with changes in market.

Beta is a systematic risk. It means this risk is not avoidable. The only way one can mitigate systematic and unsystematic risk is by diversifying the investments into different stocks with different beta values.