Forum Archive Index - December 2001

["Peter" <pmaiden@today.com.au>]

The sharechatters popular selections performed dismally in 2001. 
Refer to http://www.sharechat.co.nz/community/sgi.php
 
In some respects this was not surprising because, of the five popular 
selections, three stocks had a high beta. Beta being a measure of 
share price volatility. Beta not only measures a share's price 
volatility but it also measures how the price moves in relation to 
the overall market. 

A high beta doesn't necessary mean that a share price will go up more 
than the average of the market. The increase will have to be driven 
by actual performance - what it essentially means is that if a  
company with a high beta performs well its share price will generally 
go up more than the overall market.

The SGI included FFS with a beta of 2.01, ITC at 1.78 and THL at 
1.58. There are only 7 stocks on the NZSE with a beta greater than 
1.5. The SGI was therefore heavily weighted with 'volatile' and 
'risky' stocks. 

The overall market went up in 2001. Therefore if these three 
companies had performed, expected returns were likely to be much 
higher than the average market performance. Conversely it was likely 
that if the companies didn't perform then there would significant 
falls in their share price. We all know now that they didn't perform 
and the impact seen in the 21% fall in the SGI. A good example of 
risk/reward in action.
 
Beta is generally not a ratio used in isolation. It is a vital 
component of the Capital Asset Pricing Model (CAPM) and used a lot in 
estimating expected returns of portfolios. In times of lower expected 
returns some investors are likely to include more stocks with a high 
beta to increase likely returns - being aware of the higher risk 
associated with these stocks.
 
If anybody wanted to go down this path in NZ then the stocks with the 
highest beta on the NZSE are FFS 2.01, FBU 1.89, CAH 1.85, ITC 1.78, 
TWR 1.76, ADV 1.71, THL 1.58. AIR 1.50 and BIL 1.50. (Beta numbers 
courtesy of PriceWaterhouseCoopers)
 
Interesting list. Even if you aren't inclined to understand the 
theory I would say that most of you would not be surprised with who 
is on the list of the more 'volatile' and 'risky' stocks.

Cheers

Peter

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