tag:blogger.com,1999:blog-8152901575140311047.post4046816209696391760..comments2024-03-28T08:49:51.975-04:00Comments on Musings on Markets: What betas can... and cannot do...Aswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-8152901575140311047.post-6844446273221236652009-02-14T17:50:00.000-05:002009-02-14T17:50:00.000-05:00Of course, but in practice, if I compute a weighte...Of course, but in practice, if I compute a weighted average beta for the entire market against the S&P 500 (for example), can I get a result higher than 1? After all, not *all* stocks are included in that index so my weights aren't any good. Is there a known index that will yield an average beta of 1 for the entire market?eranhttps://www.blogger.com/profile/11336071227605704499noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-33789719874320953692009-02-14T11:50:00.000-05:002009-02-14T11:50:00.000-05:00The betas have to average to one, on a weighted av...The betas have to average to one, on a weighted average basis, because they are all computed against a common index.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-48362573834138256882009-02-12T03:21:00.000-05:002009-02-12T03:21:00.000-05:00When you say all betas must average 1, is it theor...When you say all betas must average 1, is it theoretically speaking?eranhttps://www.blogger.com/profile/11336071227605704499noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-38181204042998121652009-02-11T17:40:00.000-05:002009-02-11T17:40:00.000-05:00I second Mahesh Sethuraman's comment, if it's not ...I second Mahesh Sethuraman's comment, if it's not too much troubleeranhttps://www.blogger.com/profile/11336071227605704499noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-74983170484340725512009-02-10T10:36:00.000-05:002009-02-10T10:36:00.000-05:00Could you also give us your take on Fama-French's ...Could you also give us your take on Fama-French's critical review of CAPM in one of the posts please?Mahesh Sethuramanhttps://www.blogger.com/profile/01909074683189926487noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-24481256914375170862009-02-10T03:31:00.000-05:002009-02-10T03:31:00.000-05:00Dear Sir, Apart from risk-free rate issues, this i...Dear Sir, <BR/>Apart from risk-free rate issues, this is also a scenario where assets will likely be impaired. Once impairment sets in, return ratios, like, ROE, ROA will be inflated (of course, returns themselves are negative! Still, these ratios are inflated owing to denominators!) <BR/><BR/>Doesn't this call for adjusting these ratios? How should one do the adjustment in a scenario like this? Request your comments.<BR/><BR/>Regards<BR/>RoshanRoshanhttps://www.blogger.com/profile/06970522076893422991noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-74150885649500175262009-02-08T13:21:00.000-05:002009-02-08T13:21:00.000-05:00I will address the negative beta question in anoth...I will address the negative beta question in another post, but the true beta for an asset can be negative, if acts as insurance against a major macro economic risk. One example that is often give is gold, a hedge against inflation... If the bulk of your portfolio is composed of financial assets that can be hurt by unexpectedly high inflation, adding god to this portfolio can reduce its overall risk.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-5990514411047664822009-02-08T11:38:00.000-05:002009-02-08T11:38:00.000-05:00Hi,This brings me to another question that was ver...Hi,<BR/><BR/>This brings me to another question that was very often asked in placement interviews in B-Schools by some of the equity research companies. Can there be companies with negative beta? And if yes then is CAPM an invalid framework?<BR/><BR/>I have never quite got a convincing answer for this from most people. I know there are companies with negative beta in the market. But isn't that because of our narrow understanding of index being a true representation of the market. If you have to take the market as a whole - there should n't be a negative beta right? <BR/><BR/>And given this limitation, how do we adjust for the same in calculating the Cost of Equity within the CAPM framework?Mahesh Sethuramanhttps://www.blogger.com/profile/01909074683189926487noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-36022623882433091692009-02-08T10:54:00.000-05:002009-02-08T10:54:00.000-05:00I'm actually in the middle of teaching Ch. 4 of "a...I'm actually in the middle of teaching Ch. 4 of "applied corp finance" right now in my course right now, so this is timely.<BR/><BR/>Just found this blog so haven't posted here before, but many thanks for all the help you provide on your website! I'm an economist who was converted to teaching finance about 8 years ago and ended up loving it . . . but there's been a steep learning curve to become any good at it. Your books and website have been tremendous help to me.<BR/><BR/>By the way, and a bit off topic, I just received my copy of strategic risk taking. Are you planning a course around this material in the future? If not, I'd be interested in hearing how you might be using it or suggest using it in the classroom.<BR/><BR/>Thanks.STFhttps://www.blogger.com/profile/16261666934714196464noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-57966311718807816892009-02-08T09:50:00.000-05:002009-02-08T09:50:00.000-05:00The contrast between investing and trading does no...The contrast between investing and trading does not really make sense. If you invested in Google long term, do you not think that you are going to be exposed to more risk than investing in Coca Cola? An investment is risky and having a long time horizon cannot make real risk go away. As for Buffet, I would not take everything he says at face value. He may not adjust his expected returns for risk but he sure does adjust the cash flows.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-22132127013879572692009-02-08T03:02:00.000-05:002009-02-08T03:02:00.000-05:00There is a huge difference between investment and ...There is a huge difference between investment and Trading. Investment is what Warren Buffet does(he holds a huge ownership stock in the particular company.) He analyses a company's future prospects by understanding the business, Market for the products produced by that company. Which is very much difficult for a person who is engaged in the activities like buying a stock for a certain period,or buying a call option, trading in Futures(allowed in India) etc. <BR/><BR/>Aswath sir, How an individual can analyze a stock for trading practice?Unknownhttps://www.blogger.com/profile/15522709979869181971noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-72469165352337441832009-02-07T23:36:00.000-05:002009-02-07T23:36:00.000-05:00I agree with Professor's view. If beta is not the ...I agree with Professor's view. If beta is not the correct measure of risk, what else can be taken as risk measuring tool? If Mr. Buffet is not using beta, it is because he is gonna hold a stock for his life time. Only Mr. Buffet can do that. Not all.ValueHunthttps://www.blogger.com/profile/01878416058026249197noreply@blogger.com