Article summary: Beware Those ‘Beta Traps by Ben Levisohn Essay Example

this category does not result in favorable returns.

Investors should be cautious as a stock's beta value is not constant and can change over time. Previously stable stocks may now have high-beta behavior, while currently volatile stocks may become less volatile in the future. For instance, a decade ago, finance industry stocks had a beta of 0.9%, which has now increased to 1.6. Similarly, utility stocks had a low beta of 0.12 ten years ago but have since risen to 0.46. Additionally, there has been an increase in the number of high-beta small cap consumer-discretionary and energy stocks over the past five years.

Investors should be cautious when selecting stocks with a high-beta track record, as it involves risk. It is important to thoroughly research stocks before investing to ensure reasonable future earnings. Good stocks often come at a higher price, but prudent investors should be willing to pay the "scarcity premium". It is also beneficial for intelligent investors to recognize the differences in characteristics among stocks from various industries. For instance, the materials sector is more likely to outperform the financial sector in the markets.

Work Cited:

Ben Levisohn warns about the dangers of falling into "beta traps" in his article published on online.wsj.com on October 29, 2011. The article can be retrieved from this link on October 30, 2011.

The selected article, ‘Beware Those ‘Beta Traps’’ by Ben Levisohn, was published in the Wall Street Journal on October 29, 2011. It warns investors about the risks associated with stocks that demonstrate high price volatility. The level of volatility in a stock's price movement is quantified by its Beta value. A Beta value of 1 indicates a close

correlation with market indices like the Dow Jones Industrial Average or NASDAQ. A value below 1 signifies stability, while a Beta value significantly higher than the median 1 suggests extreme volatility.

During a bull market, high-beta stocks are often the most beneficial for investors because the positive momentum of the market tends to drive up the prices of these stocks. For instance, in October's market rally, the top 100 highest-beta stocks listed on the S;P 500 experienced a 12.4% increase compared to the index.