The basic finding:
The return correlation between Facebook and Zinga is greater that the correlation between Facebook and the S&P 500 and the trading volume correlation between FB and the S&P 500 is greater than the volume correlation between FB and Zinga.
I thought I'd run the numbers - here's what I got:
| FB | SP500 | ZNGA | |
| covar(i,m) | 0.00001535 | 0.00007962 | (0.00002087) |
| correl(i,m) | 0.04 | 1.00 | (0.04) |
| var(i) | 0.001625 | 0.000080 | 0.003155 |
| ann SD (i) |
13.962%
|
3.091%
|
19.457%
|
| beta (i) | 0.1928 | 1.0000 | (0.2622) |
| Correl of volume | 0.2592 | 1.0000 | 0.3256 |
| R-sqr from CPM |
0.18%
|
0.17%
|
Obviously these are two stocks that have very low market risk - less that 1% of their returns is explained by the S&P 500. ZNGA has a negative beta, and the confidence interval for both betas is huge.
In other words, these are two stocks whose risk is virtually all idiosyncratic. It is probably a mistake to put any weight on these beta estimates.
So, if I were a high paid consultant, I could use these figures to convince pension fund managers to buy Facebook and Zinga stock by selling them on their amazing diversification impact on the S&P, right?
ReplyDeleteYou got it - plus you'd charge 2/20 for the service.
ReplyDeleteActually, I'd get paid a "placement agent" fee for hooking up the pension with the "privilege" to invest with a private equity manager who will then charge 2 and 20 for their spectacular stock picking abilities to pay above market prices to take companies like Facebook private, again! See everyone wins (well, except the pensioners and the tax payers).
ReplyDelete