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Saving, Managing Debt, and Budgeting

Beta

How is beta analysis misused or misinterpreted?

The use of betas in analyzing possible investment choices may be misused or misinterpreted in a number of ways. Typically, high-tech investments may have high betas, yet may be good long-term investments. Utilities typically have lower betas by comparison, but offer very good returns in many investor portfolios. Beta also reviews the past, and past performance is not always an accurate indicator of future performance. Beta may not take into account current or upcoming changes to the company, or broader market shifts that may positively or negatively affect the earnings of a typical investment vehicle. Beta also does not necessarily take into consideration what happens when markets advance forward, whereby a company with a beta greater than 1.0 may outperform the market as a whole.



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