The common image of a conservative and risk-averse stock investor is one who buys Blue Chips and holds on to them forever. But it is not true that the risk-averse cannot trade short-term and compound his gains.

By picking stocks which will outperform the general market and yet are not 'risky', the conservative can trade short term without having sleepless nights. How is this done?

In a previous article "Trading With A Stock's Alpha", we dicussed picking stocks by their Alpha values instead of Beta. To recapitulate, the Beta is the slope of a regression line in a scatter-graph of stock vs Index, while the Alpha is the point at which this line cuts the Y-axis.

Non-mathematically speaking, stocks with high Beta , but a low Alpha move up and down with the market sentiment, while stocks with high Alphas are to a greater degree independent of the Index.

In this article, we show examples of stocks on the Main Board with high Alpha and stocks with high Beta. But first, to prove our theory that in a strong market, more shares will be at the higher range of Alpha values, compare Fig.1 and 2.

Fig. 1 is a frequency histogram of the Alpha values of SESDAQ stocks and Fig. 2 is a similiar histogram of Main Board stocks. In a strong market the Alpha frequency histogram will have more stocks on its right side, while in a weak market, the frequency histogram will have more stocks on the left. You can see that both markets are at the moment not very strong, but the Main Board is slighly better than SESDAQ in the sense that it has slighly more proportion of stocks with higher Alpha values.

In Fig. 3, we rank the top ten Main Board stocks by Alpha, while in Fig. 4, we rank the top ten by Beta. So Orchard Parade, Wing Tai and Marco Polo are more resistant to downward moves of the Index-in this case we used the STII. On the other hand, UPP, Hong Kong Land and UOB F will move up very fast when the Index moves up and also move down very fast when the Index moves down because of their low Alpha values.

But look again at stocks with high Alpha as well as Beta such as Marco Polo. They are relatively safe yet relatively fast. Should risk-averse but yearning-to-trade investors pick such stocks?. Of course one must remember that the status quo does not remain forever, that what is strong and fast this week may not be the same next week. Studies like this are therefore to be updated every day.

Due to their high liquidity, Blue Chip stocks usually have high Beta but low Alpha. Fig. 5 shows the Alpha-Beta graph of UOB Foreign. Note that its Beta is 1.74 while its Alpha is -0.44. The thinner Beta line shows regular swings up and down as profit-taking takes place. Experienced trader's familiar with a Blue Chip's price channel or range of trading can catch it at the bottom of the channel and sell it on the way up.

In conclusion, it can be seen that in a market there may be some stocks which can offer proportionately more gains without proportionately more risk. These are the stocks for the eager but more conservative investors.

The views expressed in this article are solely those of the author in his individual capacity and do not reflect the views of his organization.

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