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Example of calculating β using CGC, MT and a 5 Year Treasury Bill.
As expected, the β when a 5 year Treasury bill is used as the benchmark is near zero. When each stock uses the other as the benchmark the β is “less volatile than its benchmark” (near the midpoint of the range) and that is not unexpected given they are both Licensed Producers operating in Canada supplying Medical Marijuana. β of 1 when each stock is compared to itself is a good control value to ensure that there are no errors in the data source or the formula. CGC announced its intent to acquire MT in December of 2016 and the December case study hypothesized that shares of MT could be viewed as warrants of CGC that will automatically convert to CGC at no cost at a ratio of 1 share of MT to 0.7132 shares of CGC. If that hypothesis is true, we would expect the β of MT when using CGC as it comparator to be near 1. From December 21 to December 30, β = 1.04. Until the deal finalizes, there is always risk that it may not got through; therefore, β should not equal 1. In early December, β was as low as 0.85 suggesting the potential for an arbitrage opportunity (MT shares were less volatile than CGC shares) and the December case study revealed that one existed.
DIVERISFY WITHIN THE CANNABIS INDUSTRY
Achieving optimal diversification may be more art than science because of personal bias and perceptions of variables, such as risk and ethics, that creep in; however, holding uncorrelated stocks is deemed better when mitigating Unsystemic Risk is desired. There is no escaping Systemic Risk without a hedge but you know that already or you would not be investing in this space and the legal cannabis industry has more Systemic Risk than most other industries. Diversification is about reducing Unsystemic Risk but there are other reasons as to why diversified holdings may be desired – capitalizing on dramatic share price movements; holding shares on the record date for spin offs, special dividends; upside of M&A; etc. Existing shareholders of record are often invited to participate in attractive Private Placements and other financings without the requirement of Accredited Investor status.