Question

When the market is as volatile as it is during today’s times, what is the best way to evaluate a company against the market?

Answer 1

When the market is highly volatile, it means that systematic risk associated with the market has significantly increased and volatility can be measured by the beta of the stock and it can also be measured through the volatility index of the whole market.

When market is highly volatile, we need to assign various kinds of risk adjustment factors because volatility will lead to high swings in stock which will lead to high premium and which can even lead to a higher discount, because volatility can be both positive and negative in nature.

Beta is the the measure of volatility of stock so we need to assign beta to various kinds of stock in order to evaluate them in volatile markets. When higher is the beta of a stock, there would be higher volatility of the stock, and when lower is the beta of a stock, lower would be volatility of stock.

It is a general belief that aggressive stocks are highly volatile in nature and defensive stock will have a low beta associated with them as they are having lower volatility in comparison to the overall market. In markets, where there is high volatility, there must be a better allocation of resources and stocks, so that the entire portfolio is hedged against high amount of capital erosion as volatility can be lethal for portfolios.

In volatile markets, there should be a conservative approach by the valuer, and they should assign higher risk weightage to the overall stock and they should even assign higher beta to the stock and they can discount the valuation of the stock based upon the conservative approach, since there is wider fluctuations in volatile markets.