Before the Internet, investors were constantly scrambling around making phone calls and doing other methods of research to discover the best ways to invest. Overall, technology soars in the realms of the Stock Market. According to Tim’s Paper, we have gone through three different sectors when relating to the stock market and each sector has gone through its own revolution. “First, there was the agricultural revolution, then the industrial revolution, and now we are in the information revolution.” More and more smaller companies are able to work their way into the market by breaking different barriers involving technology; for example smaller companies can create their own web pages to expand to more consumers. “Information technology based companies have a high market value. Companies create higher market value with expanded services using information technology.”
Has this increase been a good thing for all people? According to Burton Malkiel in A Random Walk Down Wall Street, “Some portfolio managers have argued that diversification has not continued to give the same degree of benefit as was previously the case. Globalization led to an increase in the correlation coefficients between the U.S. and foreign markets as well as between stocks and commodities” (210).
When a broker makes a decision to invest, there are many factors that come into play such as the buying and selling price for the past couple years and the stock’s beta. Malkiel states that “the beta measurement is one of putting some precise numbers on the subjective feelings money managers have had for years. The beta calculation is essentially a comparison between the movements of an individual stock and the movements of the market as a whole” (216-217).
But has the beta, otherwise known as systematic risk, always been correct? In fact, it does have its’ downfall in the sense that “betas for individual stocks are not stable over time, and they are very sensitive to the market proxy against which they are measured” (233). However, with the growth of information technology, we will continue to break barriers towards improvements of risk analysis. Stephen Ross was one of the first to do so. “Ross has developed a theory of pricing in the capital markets called arbitrage pricing theory(APT)” (229). When using systematic elemants of risk, particular stocks and porfolios may be too complicated to be captured by beta because any particular stock index is an imperfect representative of the general market. These flaws portrayed by beta may fail to capture a number of important systematic elements of risk.
I believe that information technology has caused an increase in risk, but many investors or have continued to use the “beta” calculation as one method which may be a downfall. Our internet has given us large amounts of information on the Stock Market and many corporations. And as Malkiel points out, “We must be careful not to accept beta or any other measure as an easy way to assess risk and to predict future returns of any certainty. You should know about the best of the modern techniques of the new investment technology—they can be useful aids” (233).