Does a stock with a higher beta have more predictable returns than a stock with a low beta? please explain.?

Question

Does a stock with a higher beta have more predictable returns than a stock with a low beta? please explain.?

Answer 1

On the contrary,

A stock with a very high beta is much less predictable. As you know, beta measures a stock's systematic risk-the risk which applies to that of the whole market, risk which can not be avoided or diversfied.

A good way to think about beta is that it is how much a stock's return varies when compared directly to the return on teh market, in other words, it is the co-variance of the return of a stock with the return of the market.

So a higher beta stock, will be more volatile than the market. You will see a greater swing in volatiliy in the stock (ie, it wil move up or down more frequently) than the marekt will move. Thus, a higher beta stock is more UNpredictable.

Answer 2

No. Beta simply refers to the amount of volativity of a stock relative to the stock market. For example, if a stock has a beta of 1.0, expect it to correlate with the stock market movements. If it has a beta of 2.0, expect it to have larger swings up and down relative to the market, and if .5, less than the market.

So, it is not a measure of predictability, but rather volativity. In terms of predictability, I would suggest look at a couple things. If you find a stock and anticipate it to make a move in a certain direction look for 2 things that may give you insight into its predictability.

1) Volume. Another term, liquid. The more liquid a stock, or the more shares it trades means more people,i.e. traders, investors, will be involved in any particular move, and therefore the more participants the more likely it will work out.

2) Float. The small the float the more unpredictable a stock. It means it will only take a few buyers or sellers to cause large fluctuations in a stock. The higher the float the more predictable. Float is the number of shares available for trading. Some stocks may have only  several million, others hundreds of millions or billions, like in the case of intel.