Investing 101

Lesson 3: New Investment Technology

Beyond Beta

As with any academic theory, the academicians have a field day trying to disprove it. In the textbook, Malkiel reviews the key academic attacks, which have shown the weaknesses of depending on Beta. While the author agrees that Beta is wounded by these attacks, he isn't ready to declare its demise. Economic researchers are working to find a better market measure than Beta, which some feel fails to capture a number of important systematic risk elements. A new theory making the rounds is Arbitrage Pricing Theory (APT) developed by Stephen Ross. This theory attempts to measure the risks not captured by Beta. Some of these key systematic risks include changes in: national income, personal income, property income, interest rates, and the rate of inflation. APT is still very new and no one is sure how it will ultimately stand up with more extensive examination.

Conclusion There is no perfect measurement for risk. It's good to understand the theories and use them as part of your planning. But in reality, there probably will never be an easy way to assess risk or to predict future returns with any certainty. In the next lesson, you will learn how to make wise investment decisions based on your own financial situation.

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