For a well-diversified equity portfolio, it is important to have a mix of high beta and low beta stocks.
As an overview, beta is the volatility of a stock as compared to the index.
As an example, if a stock has a beta of 1.5, the stock will move up by 15% if the index moves higher by 10%. On the other hand, if the index goes down by 10%, the stock will move lower by 15%.
Therefore, higher the beta, the riskier in the stock.
Similarly, if a stock has a beta of 0.7, if the index moves higher by 10%, the stock will move up by only 7%. In the same way, if the index moves lower by 10%, the stock will move lower by only 7%.
Therefore, low beta stocks have less volatility.
In general, low beta stocks are from defensive sectors. Or sectors that are mature sectors. The companies in these sectors have stable earnings and cash flow.
On the other hand, high beta stocks are from high growth sectors. The earnings and cash flow can be volatile.
If a person buys 100% high beta stocks for the portfolio, the overall portfolio becomes very risk.
A person who buys 100% low beta stocks will have a very conservative portfolio.
Therefore, based on a risk appetite, it makes sense to buy a mix of high and low beta stocks.
I wanted to mention five fundamentally strong low beta stocks in the article.
The key reason is that equity market valuation looks stretched. In an event of market correction, these low beta stocks will protect the capital.
