BETA TOO HAS SHORTCOMINGS
BETA AS REAR VIEW MIRROR
Beta is a rear view mirror and does not predict the future. Past price movements are a very poor predictor of future. Most of the traders are over dependent on the beta for their single stock analysis. When you are investing in a single stock or even trading only in a single stock beta is of not much use to you. Taking decision based on the stock beta for short-term trading can give results which you would be not happy with. For example, you expect the index to be bearish in short term and hence you take a position in defensive stock which has changed the trend but its chances are very less for you to succeed.
OVER-RELIANCE OF PAST RISK
Since it relies on the past risk may not be an indicator of future risk. Importantly beta is not useful for companies of Initial Public Offer. This is because companies do not have historical data about its performance compared to the index.
Contemporary trading companies use smart beta which requires real skill since there is a lot of portfolio churning involved. This also lead to portfolio balancing and rebalancing costs and it also registers higher portfolio turnover. Smart beta is usually done by those who follow active trading and invest huge amount but it is a very tiny part of their portfolio. Smart beta inherently has high risk and high return.
CANNOT BE USED INDEPENDENTLY
Advocates of value investing, which is the process in which a researcher usually check the fundamental values of the stock before investing. Often used financial ratios for the evaluation. But they also do not reply on stock beta since it does not give a true picture as over the period of time the fundamentals of the stock would have changed drastically.
BETA FOR SMALL AND MID CAPS
The stock beta for Small Cap and Mid Cap is not as accurate as much as for large cap. Many large cap stock with very less trading volumes also face the same problem. Stock with a lack of volumes has very high chances of giving wrong risk information with the beta.
BETA DURING BEAR OR BULL MARKETS
Beta calculation process ensures that it smoothes the values of a very long period of time. Because of this process, the beta value does not show the stock reactions during an adverse bear or bull market. This makes you less prepared during a sudden increase in volatility on either direction.
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