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The concept of Beta: A measure of a stock’s volatility, or systematic risk, in comparison to the market as a whole. Also known as "beta coefficient." Beta describes the sensitivity of a stock to broad market movements. The stock market (represented by an index such as the Sensex or Nifty) is assigned a beta of 1.0. By comparison, a stock which has a beta of 0.5 will tend to participate in broad market moves, but only half as much as the market overall. A stock with a beta of 2.0 will tend to benefit or suffer from broad market moves twice as much as the market overall.
There is an inherent assumption in this theory that a particular stock would move in the same ratio in comparison to market regardless of whether the market is going up or going down. However this is questionable.
A stock which is fundamentally strong should go up at more than 1x when the market is rising but should fall less than 1x when market is falling. Similarly a stock which is fundamentally weak should rise less than the market when the market is rising and fall more than the market when the market is falling.
To prove my point lets check the movement of Reliance Industries with that of Sensex or Nifty since the time the company got demerged. It is showing two different Betas. One result when market is going up (which is more than 1) and another when market is going down (which is less than 1).
As this inherent assumption behind Beta theory is absurd this theory is absolutely useless.
