The Pros And Cons Of Volatility In The Energy Market
For the year 2016, volatility could resemble 2015. The stock market enjoyed abnormally low volatility during the Federal Reserve’s zero interest rate period, but with rates starting to return to normal, market volatility is also likely to resume. The …show more content…
According to Investopedia, beta measures the systemic risk of securities compared to overall markets. The capital asset pricing model, known as CAPM, calculates return on assets based on the securities overall beta and expected market returns.
The total stock market, which is often used as the benchmark for many funds, has a total beta of one. Other securities derive their beta based on their correlation with the market. For example, if an investment has a beta of one, the measurement indicates that the investment will move in sync with the market. Any investment with a beta less than one represents that the investment is less volatile than the benchmark.
Although beta is a useful tool, it is not a complete picture of risk and has some drawbacks. First, beta is backwards looking, typically based on three years of data. A stock in a sector long ignored by the market will have a very low beta, and if it suddenly becomes popular, the beta could rise significantly. Utility stocks were notoriously low beta, but after deregulation opened up competition, betas