Capital Markets: Observations and Insights Autumn 2019

Beyond Beta ​ Reframing Risk

RISK

• Beta is thought to be a good measure of risk but in practice it is backward looking in nature, making it a poor measure of potential losses ‒ At the tech bubble peak, the beta of technology stocks was less than one; the same was true of financials in early 2008 prior to the Global Financial Crisis

Below Market Risk at Height of Tech Bubble?

Below Market Risk Preceding the Mortgage Meltdown?

S&P 500 Technology Sector

S&P 500 Financial Sector

120%

40%

2.5

3.0

90%

20%

1.0

2.0

60%

0%

Beta

Beta

-0.5

1.0

30%

-20%

-2.0

0.0

0%

-40%

Relative Return

Relative Return

-30%

-60%

-3.5

-1.0

Source: FactSet. Beta calculated relative to S&P 500 on 12-month trailing basis. The performance data quoted represents past performance, which is not an indication or a guarantee of future results.

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