Suppose there are three different companies. The first one Trendy Tech, Inc. whose investors are “fair-weather friends.” When the stock market is going up, everybody wants to invest in Trendy Tech, but as soon as the market goes down everyone jumps ships and sells their shares. The second company is Oily Oil, Inc. Oily’s stock price seems to depend only on the price of oil and nothing else. Finally, there is Conglomerated Conglomerate, Inc. Conglomerated is a giant company with holdings in almost every industry imaginable – from cell phones to grocery stores and even amusement parks. Based on this information, which company would you think has the highest beta? The lowest beta? Which one do you think has a beta closest to 1?
Conglomerated Conglomerate market has the highest beta as a beta of greater then 1 indicates that the security’s price is theoretically more volatile than the market. As conglomerated Conglomerate inc has industry from cell phones to grocery stores then it has a greater portfolio of market and has the highest beta.
Oily Oil, Inc. has the lowest beta as its price fluctuates with the price of oil and nothing else and hence it has a beta less than 1 as it indicates that security price is theoretically more volatile than the market.
Trendy tech, Inc. has beta closest to 1 as its security price moves with the market price. Hence market price has its impact on beta equals to 1.