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Unsystemic Risk (diversifiable risk) is specific to an individual company, market segment or industry. For example, General Motors may have unique business risks but also has risks associated with the auto industry. Business risk is a good example of an Unsystemic Risk because it can be somewhat mitigated through successful portfolio diversification. Regression Analysis is used to calculate a stock’s Beta (β) and Beta measures the stock’s volatility compared to the benchmark used (perhaps the industry index). Sometimes a zero risk asset is used for the benchmark (for example, a Treasury Bill). The “math” is:
β can be calculated in spreadsheet applications such as Excel. www.barchart.com is a free website for technical analysis that also has the β for the shares of many companies. I prefer using Excel as there is just something organic about entering the information and seeing how each new data entry affects the value. Because of a lack of history for many companies, be very careful on interpreting β. For example, how reliable is β for a JR Mining company recently converted to the legal cannabis industry?
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 the market
>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 more unrelated your stock’s volatility is to the chosen benchmark.