78
UNDERSTANDING BETA
A stock with a Beta of 1 (or 100%) exactly mirrors the benchmark’s volatility. β of 1.25 theoretically means
that the stock is approximately 25% more volatile than
the stock’s benchmark comparator.
What different values of β mean:
0 - no correlation with the chosen benchmark
0 to 1 – the stock is less volatile than its benchmark
1 - the stock has the same volatility as its benchmark
>1 - the stock is more volatile than its benchmark
Using the above scale as a thumbing metric may assist the prepared Retail Investor construct a superior portfolio. The basic tenet repeated in every article is the need to continuously monitor investments and that includes recalculating β as it will change. Intuitively, if the benchmark is a ‘zero risk’ investment such as T-Bill, then the closer β is to 0 the lower the expected return is. You are not investing in this once in a lifetime industry on day zero just to beat the ROI of a T-Bill by a handful of basis points and you are also not likely willing to risk all of your investment dollars. If investment dollars are limited consider investing in companies such as Aphria Inc (TSXV:APH,OTC:APHQF), CannaRoyalty Corp (CSE:CRZ,OTC:CNNF), Canopy Growth Corporation (TSX:CGC,OTC:TWMJF), and Cronus Group (TSXV:MJN,OTC:PRMCF) as doing so may achieve your diversification objectives due to the portfolio of holdings of these companies. There are also other companies with diversified portfolios.
Before we proceed, I referenced those four Canadian companies in our January 2017 issue – three are LPs themselves or holding companies that own LPs (WEED and MJN). Just looking at their symbols reveals the transformation of this industry in just one year as Canopy Growth now trades under the symbol WEED and Aphria now trades on the TSX. Let’s look at the one year ROI of these four companies compared to the Marijuana Index.
Weedman character was created and is the sole property of and owned by Chloë Kyron. All rights reserved. The image including any likeness cannot be used in any manner without the expressed written consent by Chloë Kyron.
Any company referenced is purely for discussion purposes and not intended as a recommendation.
Louis Kyron, CPA, CGA