Question

Why do you think everybody says “Beta is dead"?

Please write in your own words.

Answer 1

Before writing about "Beta is dead" first let us understand beta and its use

Beta:

In Finance, Beta is sensitivity of stock in regards to change in market.Suppose a stock has a beta of say 2, so we understand that if the market change by 1% there would be a change of 2% in the value of stock.

Capital Asset Pricing Model widely known as CAPM is a extensively used pricing model which is given by

Price=Rf+Bs/Bm(Rm-Rf)

Rf-risk free rate of return
Bs=Beta of stock
Bm=Beta of market, which is always 1
Rm=Return of stock

hence from above formula you can understand that the pricing is significantly dependent of Beta of a stock.

Before investments were largely made based on expected price which was calculated using CAPM which inturn is dependent on Beta of the stock.

But however in present scenarios beta is gradually losing its relevance.

Now the stock does not exhibit a constant change in relation to change in market, so its not possible to have a absolute beta for a stock and further calculate its price based on such beta. This is because the stock of price is widely effected by market emotions, market news and other factors.

thus we can say that the use of Beta in present scenario is losing its relevance and in a time beta would be of no use.

hence we say Beta is Dead.