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Eta vs. Beta: Forecasting Risk

In the past, people have relied on beta (β) as their risk-measure, simply because there wasn't anything better in existence. Now, however, there is. Instead of relying on past performance (as does beta) to predict whether stocks will move a lot or stay stable, EconomicInvestor's Composite MacroRisk Index (CMRI) measures how economic factors such as the unemployment rate, the price of gold, and auto sales can and do affect individual stocks, funds, and indices.

Looking at the graph above, you can see for yourself which method works better. The goal on the graph was to group stocks from the NYSE in order of their riskiness. The ones on the left are supposed to be least risky, while the ones on the right are supposed to be most volatile. Using beta, we calculated the groupings shown here in blue. We then repeated the process using our CMRI; our results are in red. As you can see, there's a big difference. Beta does work - a little. But when deciding where to invest our money, we prefer to use the best information possible, as shown by our CMRI. How about you?

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