- Let's discuss some real beta examples.
If you are fearful of your job,
if the economy is going down, you're fearful of a recession,
then you are not going to run out and buy a new car.
But then, when the economy goes back up,
lots of people want to buy cars.
They've got this pent up demand.
That relation is reflected in a high beta.
Consider Bank of America.
Banks, especially large banks,
have started engaging in more risky behavior.
They're selling derivatives,
they're trading derivatives,
and collateralized debt instruments,
and mortgage backed securities,
which all sounds very exotic and scary
and it is scary.
Because what it has done is this:
when the broad economy is doing well,
large banks, such as Bank of America do great.
When the economy goes down, these banks get killed.
They get hammered.
They have a large beta risk.
When the economy goes up a little,
the prospects for these banks go up a lot.
Now let's consider companies with beta around one.
Google, Microsoft, and Apple all have beta around one.
This reflects the broad importance of technology
in our economy.
The economic prospects of these technology companies
pretty much track the economy.
When the economy is strong, these companies are strong.
When the economy goes down a little bit,
they go down a little bit.
They have betas of around one.
Okay, so what does it mean for a company
to have a beta that's quite low?
Well McDonald's and Walmart have betas that are quite low
because even when the economy is down,
you need to buy clothes, you need to buy groceries,
and you need fast food.
So even when the economy is down,
you still need those things.
When the economy is up, you still need
about the same number of things.
When the economy goes up,
you don't all of the sudden decide that need five Big Macs.
One will probably do.
So the fluctuations of performance of Walmart
and McDonald's are almost independent
of what happens in the broad economy.
One other industry that is almost immune
from broad economic effects is Altria.
You may know Altria by its older name of Philip Morris.
They sell cigarettes.
Even when the economy is down, smokers still need
to buy cigarettes.
Even when the economy is up, they're still buying
about the same number of cigarettes.
A low beta means a company is not really impacted
by broad economic movements.