June 21, 2011 | In: General
Can a Stock Have a Negative Beta?
Many stock investors think that it’s impossible for a stock to have a negative beta, that all stocks should move with the direction of the general market, and the first time they see a stock with negative beta, they are amazed, and they start asking questions to fellow investors on whether this is possible and how it can be possible.
In this post, I will answer this question, but first let me explain what beta, in the stock market world, means.
Beta is a metric that corresponds to the movement of a certain stock with respect to the market. Let’s look at AAPL, for example. AAPL has a beta of 1.34. Let’s assume that the stock market as whole, has a 5% expected return. Ignoring interest rates and other factors, this means that AAPL’s return on the investment will be 1.34 x 5% = 6.7%
Now, obviously, when there is a negative beta the whole thing becomes confusing. But let’s look at a couple of stocks that have negative beta:
As you can see from the above, both stocks are bearish stocks, they proportionally move with the inverse of the market. So, if the market goes up, they go down, and vice versa, and if you notice both HOD, and HND have negative betas (-2.78 and -0.33, respectively). Let’s now take HOD as an example to make the same calculation that we did with AAPL. If the market has a return of 5%, then HOD should return -2.78 x 5% = -13.9%. However, if the market has a return of -3%, then HOD should return -2.78 x -3% = 8.34%. You see, HOD started yielding positive return when the market was down.
In conclusion, yes, a stock can have a negative beta, and this usually means that the stock is one of those reverse ETFs.