Comments on: The Beta Coefficient—a crucial yet highly misunderstood and misused tool in risk management; also a follow up on our Real Estate piece, with an explanation of ‘The Tara Effect’ http://www.hedgeworld.com/blog/?p=4611 A look behind the hedge fund curtain Wed, 19 Jun 2013 03:20:33 +0000 http://wordpress.org/?v=2.6 By: saunderscc http://www.hedgeworld.com/blog/?p=4611#comment-49573 saunderscc Wed, 04 Apr 2012 15:14:20 +0000 http://www.hedgeworld.com/blog/?p=4611#comment-49573 The author suggests that beta is easily misunderstood or misinterpreted. One need to read no further than the final sentence of the first paragraph for an illustration of this point, "Put more simply, beta measures a security's correlation to the general market." Uh, no. Correlation measures a security's correlation to the general market. Beta, on the other hand, measures a security's sensitivity to the general market. The author has confused the concepts of correlation and beta in this article. It is quite possible that a security could have a correlation of 1.0, yet might only exhibit a beta of 0.65, for example. In this example, the security's movement would be perfectly correlated directionally with the general market. However, it's sensitivity to the market's movement would result in expectations of movements that are 65% of the magnitude of the market's moves. This is a subtle, but important difference. Correlation and beta aren't interchangeable, but they are often confused. The author suggests that beta is easily misunderstood or misinterpreted. One need to read no further than the final sentence of the first paragraph for an illustration of this point, “Put more simply, beta measures a security’s correlation to the general market.”

Uh, no. Correlation measures a security’s correlation to the general market.

Beta, on the other hand, measures a security’s sensitivity to the general market.

The author has confused the concepts of correlation and beta in this article.

It is quite possible that a security could have a correlation of 1.0, yet might only exhibit a beta of 0.65, for example. In this example, the security’s movement would be perfectly correlated directionally with the general market. However, it’s sensitivity to the market’s movement would result in expectations of movements that are 65% of the magnitude of the market’s moves.

This is a subtle, but important difference. Correlation and beta aren’t interchangeable, but they are often confused.

]]> By: LOFL http://www.hedgeworld.com/blog/?p=4611#comment-49353 LOFL Mon, 02 Apr 2012 12:48:44 +0000 http://www.hedgeworld.com/blog/?p=4611#comment-49353 And we were probably friends. Just exercising my right to remind Eddie that he was "smarter" than all of us & our clients. And we were probably friends. Just exercising my right to remind Eddie that he was “smarter” than all of us & our clients.

]]> By: Got alife http://www.hedgeworld.com/blog/?p=4611#comment-49107 Got alife Fri, 30 Mar 2012 20:41:34 +0000 http://www.hedgeworld.com/blog/?p=4611#comment-49107 Nah, I worked there too, hes just smarter than you. Get a life man. Nah, I worked there too, hes just smarter than you. Get a life man.

]]> By: LOFL http://www.hedgeworld.com/blog/?p=4611#comment-49105 LOFL Fri, 30 Mar 2012 20:09:13 +0000 http://www.hedgeworld.com/blog/?p=4611#comment-49105 Musta spent a lot time at the prison library. Musta spent a lot time at the prison library.

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