When investors discuss beta, it is generally understood as correlation of an asset or portfolio’s risks to those of the general market. Such measurements depend on historical averages and assume normal distribution of volatility, or risk. While such metrics work fine during normal market periods, during periods of crisis, like 2008, they are worthless, as new extreme events force markets into new behavior regimes. Under such regimes, assets and portfolios are subject to stress beta, and investments previously considered uncorrelated suddenly behave in unison.
Stress Beta
by • May 9, 2012