[pika] Time for Finance

In my finance class, we’re learning about CAPM, essentially a model that can be used to predict expected returns on a stock.  The most interesting part of the model is the beta.  A security’s beta essentially describes how correlated its returns are with the market.  A beta of 0 indicates no correlation.  A positive beta indicates a positive correlation and a negative beta indicates a negative correlation.  For example, Ford Motor Company has a beta of 2.3.  This means that it is highly correlated with the market–so when the market goes up, Ford shares tend to rise too.  When you think about creating a portfolio, it’s important to try to pick some securities with low/negative betas as sort of an “insurance policy.”  That way if the market falls, as it did during the 2008 recession, you are partially shielded.  One such stock is General Mills that has a beta of only 0.16.  I’ve attached a graph benchmarking General Mills with the S&P 500. Notice that as the S&P 500 fell significantly  during the recession, General Mills didn’t fall by that much. (General Mills is in blue). I hope that next time you invest that you’ll consider looking into betas!

3 thoughts to “[pika] Time for Finance”

  1. I have absolutely zero knowledge in the area of finance, but I found your post to be really interesting. Before I went to college, I met with a financial advisor to help me choose what stocks to invest the money that I had earned in high school. She attempted to educate me on the portfolio that she had put together for me, but I still did not fully understand what a beta was until I read your post. I can imagine that the information that you have learned in your finance class is really relevant in the real world. I am considering taking this course at some point in my college career.

  2. Thanks for you reply, I’m glad to hear that you are interested in Finance. A good introductory course is Finance 300. If you want more information about it, please don’t hesitate to ask.

  3. Wow that is so cool! I have never invested money before, but my brother has been doing it since he was like 13 or something. I will tell him about this. I will eventually have to invest money, for my retirement or something, and so knowing about betas will be helpful then. Thanks!

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