A stock’s beta is its sensitivity to a market index like the S&P 500, with a beta = 1.0 being risk similar to market risk. But most indexes, including the S&P 500, value weight stocks so are dominated by big firms. In July 2024, three stocks⸺Microsoft, Apple, and Nvidia⸺made up 21% of the index while the largest five stocks made up 27% and the biggest ten 30%. NVIDIA alone accounted for almost 1/3 of the S&P 500 return in the first half of 2024 and 55% of the return was due to five stocks (Wall Street Journal report, July 6. 2024).
Is a stock’s risk to be defined relative to a few tech stocks, particularly with tech returns at the time generated by speculation about the future with AI? In the second quarter of 2024, large tech companies drove the S&P 500 up 8.2% while the Russell 2500 index that emphasizes small stocks was down 4.3%. Negative beta? Low risk? In the five years to July 2024, the S&P 500 was up 85.8% while the Russell 2000 was up 28.9%, low beta. Are small firms less risky?