cardude
Full time employment: Posting here.
- Joined
- Feb 21, 2006
- Messages
- 599
Join Date: Jan 2006
Posts: 374
This is my understanding:
- The EMH suggests that only way to obtain obtain greater return is to assume greater risk
- If that is the case then return should be a unique, montonically increasing function of beta (volatility) and beta should be the only statistically significant independent variable
- But the problem is that is not the case
- If you do the statistics it turns out both market cap and style are statistically significant and that greater returns are obtained for value (vs growth) and small cap (vs large cap)
- These returns are in excess of what one would expect from risk alone
- This is the justification for the so-called 3 Factor model that explains market return in term of risk, market cap and style
Does anyone still believe that beta is a good measurement of risk? It just blows me away that some think just because something is volatile then it is inherantly risky, because that's just not the case. For example, if you own the stock of a good, solid, profitable company that had been trading for $50 per share, and then the price immediatly went down to $25 per share, then beta would suggest that the price of $25 has more risk because of the big increase in volatility.
I really hate all the different asset "classes" that some focus on. To me there is only one logical "style" or "class" of investing, and that's value. I mean, when you make an investment you always need to make sure you get a good price, just like buying a house or a car. All those different asset classes were just devised by the financial community to help (trick) the general public feel good about their investments IMO, but they make little actual sense.