Name: Samrat Kumar Das 1 Subject : Investment Analysis And Portfolio Management

Can Beta be negative?

Beta is a metric that corresponds to the movement of a certain stock with respect to the market. For example Company A has a beta of 1.34. Lets assume that the stock market as whole has a 5% expected return. Ignoring interest rates and other factors, this means that As return on the investment will be 1.34 x 5% = 6.7% Now, obviously, when there is a negative beta the whole thing becomes confusing. Lets take an example of couple of stocks that have negative beta: - Company B (goes up when oil goes down) - Company C (goes up when gas goes down) As you can see from the above, both stocks are bearish stocks, they proportionally move with the inverse of the market. So, if the market goes up, they go down, and vice versa. Lets assume both B, and C have negative betas (-2.78 and -0.33, respectively). Lets now take C as an example to make the same calculation that we did with A. If the market has a return of 5%, then C should return -2.78 x 5% = -13.9%. However, if the market has a return of -3%, then C should return 2.78 x -3% = 8.34%. You see, C started yielding positive return when the market was down. In other words negative beta corresponds to assets that have returns lower than the risk-free rate. But the risk-free rate has zero correlation with all assets and negative beta asset not. So, in theory, a non-typical investor might be willing to hold a negative beta asset because -given a special co movements with other assets- it might reduce the total risk of a portfolio. More usually, some hedge funds build portfolios that have a negative beta relative to the market in order to play a contrarian strategy (not developed in India but this is probably a flaw strategy). In practice, negative beta stocks are hard to find: gold stocks, liquidation companies, pawn shops (although they are rarely listed). In the Indian stock markets, it is very difficult to get the stocks with negative beta. For brief periods of times, some stocks may behave like a negative beta stock but may not necessarily be a negative beta stock. Negative beta is more of a trend in the economy rather than a permanent behavior. For example, IT stocks behave quite opposite to how markets behave these days. Primarily its because of sentiments and also cause of $/Re rate. Gold stocks are the best source of negative betas. Any of the inverse ETFs would have negative betas by definition. Commodity-related ETFs could be candidates, although most are relatively new, so short trading histories. In conclusion, yes, a stock can have a negative beta, and this usually means that the stock is one of those reverse ETFs.