Question

Are some stocks less sensitive to market/systematic factors (recession, depression, war, etc.) than others? Be sure to provide some examples. How can the beta be used to assess the systematic risk associated with a stock? Also, is there a way that we can use the beta to create a portfolio that may have a minimal systematic risk? What do you think the expected returns would be if we minimized this risk?

Answer 1

Yes some stocks are less sensitive to market/systematic risk. For example Walmart thrived during recession as high end buyers went to walmart to borrow on discounted rates. In recession, people cut down on luxuries and spend mostly on basic needs. Walmart stores provide all of these and hence it was not much hit my recessions in 2008-2009.

Beta is slope of regression of a stock's return with that of returns of a benchmark market portfolio such as S&P 500 or a more broadmarket index. Higher the beta higher the exposure to sytamatic risk vis a vis market. Low beta stocks will have lesser risk. WAlmart has always had a lower beta hence it is less risky.

Beta can be used to bring down systematic risk and increase diversification in the portfolio and bring returns to minimal risk adjusted basis.

Expected return will less if we minimize risk. Expected returns increase with risk as returns are compensation for risk taken.