Volatility versus Beta of FEZ and Its Top Performers



Volatility versus beta

Volatility shows the fluctuation in periodic returns from average returns, whereas beta represents market sensitivity. Beta is also known as systematic risk.

The Capital Asset Pricing Model states that there are two kinds of risks that exist when investing in equities. One is systematic risk, and the other is non-systematic risk. Non-systematic risk can be minimized by diversification, whereas systematic risk cannot be diversified. Systematic risk is measured by its beta.

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The SPDR Euro Stoxx 50 ETF (FEZ) had a volatility of ~19.3% in the trailing-one-month period from September 16, 2015, to October 16, 2015. Its volatility from August 16, 2015, to September 16, 2015, was ~14.5%. The increase in volatility or total risk is due to an increase in non-systematic risk compared to systematic risk.

FEZ’s systematic risk increased because of global factors such as the following:

  • China devalued its currency: In August 2015, China devalued its currency twice, which further affected the prices of commodities across the world.
  • Crude prices have been down: Crude oil prices have been down because of the oversupply in the crude oil market.
  • The global economy has witnessed deflation: The above two factors have resulted in a deflationary situation where growth is affected by deflation and is impacting the earnings of cyclical equities.

Non-systematic risk increase

The SPDR Euro Stoxx 50 ETF’s non-systematic risk increased because of some uncertainty in the portfolio itself such as the Volkswagen emissions scandal issue. It was found that the company did some cheating in its emission testing system. This news hammered the stock’s performance. It lost ~40% over the past month.

Banco Santander announced that it will expand its investment banking business in the United States and the United Kingdom, though its business in these regions is making continuous losses. This news affected the stock and it was down by ~25.5%. over the past month.

The volatilities of Unilever (UN), SAP (SAP), and L’Oréal (LRLCY) were 28.7%, 32.3%, and 34.6%, respectively.

The SPDR Euro Stoxx 50 ETF has a beta of ~1.14x with respect to the iShares MSCI All Country World ETF (ACWI). It shows that if the ACWI moves 1% either positively or negatively, then the FEZ will move 1.1% to the same side, respectively.

The iShares MSCI All Country World ETF is invested in large and giant capitalization stocks such as Apple (AAPL), Microsoft (MSFT), ExxonMobil (XOM), Johnson & Johnson (JNJ), and Wells Fargo (WFC).

The betas of Unilever, SAP, and L’Oréal were 1.49x, 1.64x, and 1.71x, respectively, with respect to the iShares MSCI All Country World ETF. Above is a graph that shows the volatilities and betas of the SPDR Euro Stoxx 50 ETF and its top performers.

In the next part of the article, we’ll analyze the events that drove key stock performances in the SPDR Euro Stoxx 50 ETF and the reasons most of the sectors underperformed.


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