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The common image of a conservative and risk-averse stock investor is one who
buys Blue Chips and holds on to them forever. But it is not true that the
risk-averse cannot trade short-term and compound his gains.
By picking stocks which will outperform the general market and yet are not
'risky', the conservative can trade short term without having sleepless
nights. How is this done?
In a previous article "Trading With A Stock's Alpha", we dicussed picking
stocks by their Alpha values instead of Beta. To recapitulate, the Beta is
the slope of a regression line in a scatter-graph of stock vs Index, while
the Alpha is the point at which this line cuts the Y-axis.
Non-mathematically speaking, stocks with high Beta , but a low Alpha move up
and down with the market sentiment, while stocks with high Alphas are to a
greater degree independent of the Index.
In this article, we show examples of stocks on the Main Board with high
Alpha and stocks with high Beta. But first, to prove our theory that in a
strong market, more shares will be at the higher range of Alpha values,
compare Fig.1 and 2.
Fig. 1. Frequency histogram of the Alpha values of Main Board stocks.
Fig. 1 is a frequency histogram of the Alpha values of SESDAQ stocks and
Fig. 2 is a similiar histogram of Main Board stocks. In a strong market the
Alpha frequency histogram will have more stocks on its right side, while in
a weak market, the frequency histogram will have more stocks on the left.
You can see that both markets are at the moment not very strong, but the
Main Board is slighly better than SESDAQ in the sense that it has slighly
more proportion of stocks with higher Alpha values.
Fig.2. Frequency histogram of the Alpha values of SESDAQ stocks.
Fig. 3. Top ten Main Board Stocks by Alpha ranking for date ending 960408.
Fig. 4. Top ten Main Board stocks by Beta ranking.
In Fig. 3, we rank the top ten Main Board stocks by Alpha, while in Fig. 4,
we rank the top ten by Beta. So Orchard Parade, Wing Tai and Marco Polo are
more resistant to downward moves of the Index-in this case we used the STII.
On the other hand, UPP, Hong Kong Land and UOB F will move up very fast when
the Index moves up and also move down very fast when the Index moves down
because of their low Alpha values.
But look again at stocks with high Alpha as well as Beta such as Marco Polo.
They are relatively safe yet relatively fast. Should risk-averse but
yearning-to-trade investors pick such stocks?. Of course one must remember
that the status quo does not remain forever, that what is strong and fast
this week may not be the same next week. Studies like this are therefore to
be updated every day.
Fig. 5. Alpha-Beta profile of a Blue Chip. The thicker line is the alpha.
Due to their high liquidity, Blue Chip stocks usually have high Beta but low
Alpha. Fig. 5 shows the Alpha-Beta graph of UOB Foreign. Note that its Beta
is 1.74 while its Alpha is -0.44. The thinner Beta line shows regular swings
up and down as profit-taking takes place. Experienced trader's familiar with
a Blue Chip's price channel or range of trading can catch it at the bottom
of the channel and sell it on the way up.
In conclusion, it can be seen that in a market there may be some stocks
which can offer proportionately more gains without proportionately more
risk. These are the stocks for the eager but more conservative investors.
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