Beta of stocks and Strategy selection
As we enter September, there is quite a bit of uncertainty in the global scene. An attack on Syria seems all but given at this point, and there is a looming battle in Congress over the debt ceiling and Obamacare. All of this seems to indicate a volatile month in the markets.
Given these conditions, it helps to review how we choose stocks, and then more importantly how we choose individual strategies for such an environment. An important consideration during these times is Beta of a stock.
Beta is defined as the correlation of all stocks to the S&P 500 Index (SPX). A calculation is made based on the past 12 or 24 months or any other length of time, and the price movement of a stock is plotted against a $1 movement in the SPX, and a correlation is calculated. Stocks that have a Beta of more than 1 are said to be well-correlated or strongly correlated. Stocks that have a Beta of 0.5 or less are said to be weakly correlated..
The following video explores the concept of Beta, and the video also discusses the general trading environment we can expect to see in September. And most importantly, what strategies would we choose and what are the considerations for such a market environment..
Your comments are most welcome..