Can beta be negative?

Can beta be negative and is there an example of a stock/company that would have a negative beta?

No reason why beta couldn’t be negative, although I can’t think of what kind of company would be able to survive long on a negative beta, given that markets tend to rise over the long term. Maybe some public law firm specializing in bankruptcies or something. A strongly negative beta company which lasted over 20 or 30 years would have a stock price that tends toward zero. However, some ETFs that mimic short funds should have a negative beta. For example, Proshares has some sector funds and I think some of them also have short funds. So a Short Energy ETF (not sure there is one, but they might have one), would have a negative beta. I don’t know what short funds do if the market takes off and the share price of the ETF becomes something like $0.50. I assume they would do the opposite of a stock split. Does anyone know?

I suppose just by looking at the formula for Beta it could be negative: Beta = covariance / variance…and covariance does not have to be greater than 0 where as variance will always be positive given that you square deviation to get variance… so i guess in theory beta could be negative. For a normal corporation beta couldn’t be negative since the long run average return on the market is expected to be greater than zero (otherwise you wouldn’t invest money in the stock markets)…

Gold’s beta can be negative, that’s why when the market is very volatile people tends to buy gold as storage of value.

Yes it can be negative…when the correlation between the asset adn the market is negative beta will be negative

Gold’s beta definitely.

at the start of bear markets people start looking for negative beta stocks - over medium term (say 5 years) often defensive stocks have -beta - eg healthcare, consumer staples, beer, etc. Beta can be negative. This fact means that the stock is inversely corellated with the market. It is believed that shares of gold-mining companies are beta-negative. For example, on August 14, 2007, beta of Vista Gold Corp. (VGZ) was –0.81.

I still think a company probably can’t have a long-term and substantially negative beta and still survive, because it would imply that the stock price (and therefore the equity value) would be declining as the stock market trends upwards. Therefore, such a company would eventually go bankrupt. However, there are at least two possibilities that would allow for negative betas. The first is where the beta is “conditional,” or when beta is negative in a falling market but positive or zero in a rising market. Gold companies might do that (though they haven’t lately AFAIK), but I suspect that no company could have a substantially positive beta in good times and a substantially negative beta in bad times without opening up some arbitrage opportunities, so more likely beta would be close to 0 in good times and negative in bad times. Even that might present some arbitrage opportunity, since the payoff would look a bit like buying a put, but perhaps not as extreme as the other case. The other possibility is if beta is large in magnitude but the correlation between market and company is low. Generally, high beta means high correlation, but it’s not necessarily the case if the company stock is substantially more volatile than the market. In that case, it is conceivable that the part of volatility that is not explained by market moves might have an upwards or nonlinear drift that is sufficient to overcome the effects of a long-term rising market plus a negative beta. If I had access to the right datasets, it would be interesting to see what companies come out of a screen like that.

hahaha…i asked this question to the people around me. lets just say just cause you have your CFA doesn’t mean you know the right answer.

Collection agencies usually have a negative beta.

SPY Short etf will have a negative Beta, comon :slight_smile:

OK, I looked in the AAII database, and it looks like there are lots of companies with a negative beta (as high as -9, even). Now, I’m not 100% sure how AAII computes beta, but I assume it’s a simple price regression vs the S&P where they take the principal regression coefficient. Of the approximately 1000 stocks in the AAII database with Beta < 0, about 90% of them are penny stocks. This proportion gets higher the further negative beta gets. Some of them do appear to have decent cash flow growth, but I guess that doesn’t attract investors.

Yeah, all those companies with negative betas in the AAII database are companies that moved against the SP500 over the last 5 years. It doesn’t mean much… there are better ways to get the beta for the company.

Not sure that fine-tuning the window or sampling algorithm for beta is the best approach here. What we’re really looking for in “negative beta” stocks is a put, right? So the screen should be something like: stocks which, for a 2 sigma drop in SPY, will jump up significantly.

Can beta be negative? This is an interesting question. According to the CAPM, beta is a measure of systematic risk. In this framework, wouldn’t a negative beta indicate that a stock or portfolio has less risk than a riskless security? Is this possible? I think one thing to consider when calculating betas is whether or not they are statistically signficant. This could be done using a t-test. Also, I think when a beta is calculated, it makes sense to look at the r-squared of the regression. I think that you would find little explanatory power with the x variable when negative betas are calculated. I have run into this before when calculating betas for community banks. Often time they will have a negative beta but the r-squared of the regression is close to 0. Can a beta be negative? - sure. But I would ask is the negative beta significant. Beta also depends on how it is calcualted - time frame, daily, monthly, or annual data, etc. Any thoughts?

Exactly, was just going to say that shorting is how you get negative levels of beta. Willy

One point to be noted down is that negative beta still allows the company to have positive gains even when the overall market as well is reporting positive gains. As CAPM says, E(R_stock) = RFR + beta( E(R_mkt - RFR) ) e.g. RFR= 5%, R_mkt = 8%, beta = -1.5, E(R_stock) = 5% + (-1.5)*(8%-5%) = 5% - 4.5% = 0.5% Negative beta only means that statistically direction of the return on overall market and on the given stock are opposite, doesn’t necessarily mean the sign of total return should be opposite versus stock market. So, if the company can survive very low returns while overall market is doing good, it can go get a killing when everyone else is doing bad. So, having a negative beta doesn’t necessarily mean that the company would have to go bankrupt in the long run. Also, it appears to me that beta of a long-short hedge fund, say, would change over time (even change in sign) depending upon whether the fund is net short or long. Long-short fund would have the flexibility to go net short during a economic downturn and hence have a negative beta, and go net long during an upturn to have a positive beta. And, beta assumes that risk is symmetrical. There could be companies with asymmetrical risk, those that have good returns when market is doing bad, but not symmetrically as bad returns when market is doing good.

The absolute value of beta indicates the degree of systematic risk relative to the market. The sign shows whether the security moves in the same direction as the market or not. It’s like the correlation coefficient (and if you multiply by the ratios of market to asset volatility, you’ll get the correlation coefficient). So, zero beta is the mimimum level of *systematic* risk (a zero-beta stock is uncorrelated with the market, but may still have ideosyncratic/asset-speciic risk that isn’t compensated). A riskless asset is also uncorrelated with the market (beta=0), but has no asset-specific risk, so it really is minimum risk. If you have a beta=-1 stock, its systematic risk is just as large as the market’s (when market goes up by 1%, stock goes down by 1%), so the future price is just as uncertain or volatile as the market (or larger, if you include the asset-specific risk). Also, I think CAPM is not the right source here. It’s the Security Market Line, which doesn’t require as many assumptions as CAPM. In Stalla, they taught us to recognize the Security Market Line as the chart with beta on the x-axis, and the Capital Market Line as the chart with standard deviation on the x-axis (and the efficient frontier on the chart, usually). That was a really helpful differentiating mechanism that has stuck with me.