The Beta is just a tool and as is the case with any tool, is not infallible. While it may seem to be a good measure of risk, there are some problems with relying on beta scores alone for determining the risk of an investment.
• Beta is not a sure thing. For example, the view that a stock with a beta of less than 1 will
do better than the market during down periods may not always be true in reality. Beta scores merely suggest how a stock, based on its historical price movements will behave relative to the market. Beta looks backward and history is not always an accurate predictor of the future.
• Beta also doesn’t account for changes that are in the works, such as new lines of business or industry shifts. Indeed, a stock’s beta may change over time though usually this happens gradually.
As a fundamental analyst, you should never rely exclusively on beta when picking stocks. Rather, beta is best used in conjunction with other stock-picking tools.
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