But the quest for better returns comes with greater uncertainty. That’s why investors have developed so many tools to take the edge off the potential surprises stocks can spring on them… from fundamentals like P/E ratios to technicals like trend lines. Not surprisingly, the academics in finance have worked on the problem, too. And boy do they have a deal for you. This one involves our new best friend, volatility. We’ve had two unusual tools for looking at volatility—Average True Range and Zigzag. Now we’ll look at the one that gets all the press and even went to college.

Suppose you had to choose one stock from several to buy, but you weren’t allowed to know anything about the companies. You aren’t allowed to ask about any of their strategies for growth or to find out whether they have enough cash flow and current assets to cover the bills. You don’t know their profit margins or even what business they are in.

Well fear not, oh lucky you. You can use the academic version of volatility to measure your risk. It’s called beta, and nothing could be more uncomplicated than this. It’s a miracle anything so understandable even got published, but it did and finance schools from coast to coast have embraced it.

Here’s the drill: If the beta is high, the stock is risky, though it could pay off well but there’s a lot of danger. If beta’s low, the stock will probably just hum along. The return may be market average or modest, but the risk is low.

So far, we’ve looked at volatility you can see with your eyes, volatility you can measure in dollars and sense (ATR). And volatility you can describe in percentage (Zigzag). The academic’s beta version is volatility measured yet another way—in comparison to the market. Usually, they use the S&P 500 as a stand-in for the market.

This measure assumes the market has a value of 1.0. Any stock that moves in tandem with the market, about the same amount also has a 1.0 beta.

If it moves twice as much, beta goes up to 2.0.

If it moves 20% less than the market, the beta falls under 1.0, to 0.8.

You get the idea. It can also be negative. If a stock moves half as much as the market, but in the opposite direction, the beta is -0.5. Most stocks fall between .5 and 2.5, with more of them clustered toward the higher end of the scale.

So now you know exactly how to find a safe stock. Yes, sir! You go buy yourself some Enron in 2000. You know it’s super safe because Enron only had a beta of 0.47.

Here’s your low beta— Enron 2000:

This is known as using damned lying statistics.So what if Enron is going to drop from $89 to 60 cents and you could have just looked at the actual facts of the business like cash flow instead of beta and avoided all that pain? As Warren Buffett has said, this is the kind of common sense that’s OK in practice, but it will never work out in theory.

Using beta-volatility as a measure of risk would lead you to a strange version of safety today as well. You might buy Warner Chilcott (beta 0.6), iParty (0.6) or Amcon Distributing (-0.5) or Education Realty Trust (0.2)—all companies with massive debt, poor growth and small to no profits. Any of those could be winners on some planet, but to call them low risk is like calling LeBron James medium-big.

More than 30 years after Japan’s only airliner program since World War II ended as a commercial failure, the country is making a multi-billion-dollar bet that it can succeed in the jetliner market.

Japan’s Mitsubishi Heavy Industries Ltd. (PINK: MHVYF) has unveiled a plan to develop a “regional” jetliner for use by airlines all around the world. The controversial project gained global credibility in recent weeks after analysts began to speculate that Toyota Motor Corp. (TM) – the world’s No. 1 automaker by sales – would join the development team. Toyota subsequently confirmed its involvement, announcing plans to take a 10% stake in the venture and injecting $67 million to help get the initiative off the ground. The Japanese government is backing the program.

It’s a big gamble for Mitsubishi and its partners: The regional airliner market is right now dominated by Bombardier Inc., of Canada, and Embraer (Empresa Brasileira de Aeronautica SA) (ERJ) of Brazil. And firms in both Russia and China – each with a major U.S. corporation as a partner and co-pilot – already have targeted this market, and have a solid head start on the Mitsubishi team.

Still, the potential payoff is hefty enough to warrant the risk. Such key global trends as rocketing fuel prices, soaring global travel, fast growth in Asia, Latin America and the Middle East, and ongoing problems with major air carriers across the world are stoking worldwide demand for efficient, economic regional jets. And that demand could persist until 2030, many experts predict.

“In terms of the macro picture, demand is there for this type of jet,” Mizuho Investors Securities Co. Ltd. senior analyst Yuichi Ishida told the Reuters news service. “Money-losing regional routes could turn profitable by using them. But the real question is whether there is room left in this market for Mitsubishi Heavy.”

To date, the so-called NAMC YS-11 – a turboprop airliner built by a Japanese consortium – is the only commercial aircraft made in Japan in the post-World War II era. The program was initiated by Japan’s Ministry of International Trade and Industry in 1954. The aircraft was rolled out in 1962 and production ended in 1974 – hardly qualifying it as a “success” from a financial standpoint.

Toyota’s Desire to Fly

Toyota said its motivation was primarily patriotic – the Mitsubishi jet is being backed by the Japanese government, which is searching for ways to for its smallish aerospace business to become more of a global player, especially after losing other industries to South Korea and China.

Toyota – which edged ahead of General Motors Corp. (GM) in the first quarter to become the world’s top-selling automaker – said it also would be looking for ways to adapt the technological know-how developed in its aerospace activities to its core automaking business. That’s not just an empty claim made to justify its diversification into the aerospace sector: The Mitsubishi MRJ70 (70 seat) and MRJ90 (90 seat) jetliners are to be the first regional jets to make extensive use of high-strength/lightweight “composite” materials, such as those found on the new 787 Dreamliner being developed by U.S. aerospace giant, The Boeing Co. (BA).

Although it hasn’t built a commerical aircraft in decades, it is an experienced subcontractor in that area, and is a veteran defense contracting firm. For example, Mitsubishi already is a key manuacturing partner on the long-range Boeing jet. And it has experience building such military aircraft as the F-1 fighter, T-2 trainer – both supersonic jets that the company built on its own – and the F-2 fighter, a Japanese-built version of the U.S. F-16 Fighting Falcon that was produced in partnership with Lockheed Martin Corp. (LMT)., the No. 1 U.S. defense contractor.

Toyota, too, has some experience, and already operates a small aerospace research team. Analysts say that venture could easily take flight and become a major business operation. That’s just what happened with Toyota’s robotics business, which started out as a fairly tiny research operation, but today is one of the company’s better-known businesses outside its core auto operation.

Honda Motor Co. (HMC), Toyota’s chief rival in Japan, already has expanded into the aircraft business; its futuristic seven-seater HondaJet light business jet has garnered heady praise for its advanced design and elegant lines. The company was supposed to start taking orders for the airplane sometime this month.
Toyota’s investment in the Mitsubishi jet is the largest of any company outside the Mitsubishi corporate network, or “keiretsu” of related companies. Other backers include domestic Japanese trading companies and the government-supported Development Bank of Japan. Foreign suppliers also will be involved.

To Market, To Market

Why is Mitsubishi – Japan’s largest producer of machinery – getting into the airliner business? In a word: Opportunity.

Over the next 20 years, Boeing itself is forecasting that air carriers worldwide will need to acquire 28,600 commercial aircraft of all types – with a potential value of $2.8 trillion. The Boeing forecast is generally viewed as the world’s best analysis of the future global market for commercial airliners and cargo aircraft.

The huge revenue potential in the global airliner market – combined with the low number of viable competitors and the high barriers faced by new potential entrants – is a big reason that Money Morning’s investment gurus have repeatedly mentioned Boeing as a promising global investment for years to come.
During that same 20-year stretch addressed by Boeing’s market forecast, China will have to buy 3,400 airliners, a requirement worth $340 billion. That will make China the fastest-growing airliner market in the world, and will also rank it as the biggest market outside the United States for new commercial airliners. In fact, if you average it out, from China alone you’re talking about sales of $17 billion a year for the next two decades.

This staggering shopping list will include the globetrotting tarmac queens being built by Boeing and European rival Airbus SAS.

But global forces also are revving up demand for regional jetliners, like those being dreamed up by Mitsubishi.

According to Mitsubishi, the world’s airlines will order 5,000 regional jets over the next two decades as global carriers seek out fuel-efficient airplanes for shorter routes and developing nations expand their airliner fleets to fuel economic growth.

That’s not an arbitrary figure, either: The company spent several years analyzing the market and projecting the potential demand for the jet, and designed the specifications specifically around its findings. The plane will be:

• Small, so it can fly out of regional airports.
• Made of lightweight composites to make it strong and fuel efficient.
• Fast (with cruisng and maximum speeds of between 0.78 and 0.82 times the speed of sound, according to published reports).
• Profitable to operate, carrying 70 to 90 passengers, depending upon the model.
• And with a good range – 920 nautical miles for the base model, although extended-range (1,400 nm) and long-range (1,960 nm) versions will be available.

“Mitsubishi Heavy has always been just a partner of Western aircraft makers,” Mitsubishi Heavy President Kazuo Tsukuda said at a news conference that talked up the company’s pet project. “Now we want to take advantage of changes in the marketplace such as high fuel costs and a greater need for environmentally friendly aircraft.”

Last week, we took a look at how you can accidentally hurt yourself when you mismatch a high-volatility stock with a stop loss. This week, we’ll discuss an easy way to keep you out of that kind of trouble.

Very volatile stocks aren’t just likely to trip your stop losses—if you even use stop losses—they also tend to look like they’re about to drop dead a few times a year. You see this, you sell the stock, and then the next week it’s back setting new highs and you’re groaning. So now, let’s look at how to measure volatility.

If volatility is simply a lot of movement, does that mean a lot of dollar points up and down each day? A large percentage of its stock price each day? Or, a lot compared to an index?

All those possibilities contribute something to the story. But the most intuitive place to start is with how much a stock goes up and down in price. We would accept gigantic moves to the upside, of course. But how much movement the wrong way are we courting to get that? Is the stock likely to gain or drop $5 in a single day on a regular basis, or only 75 cents in a normal swing?

There is a very simple way to check this. It’s free. If you have a computer, you can get the facts at Stockcharts.com easily. Another free source is Incrediblecharts.com. The tool you want is called “average true range,” or ATR. Let’s take a look:

Here’s a nice little biotech that is well established, Gilead Biosciences. On this chart, the ATR for Gilead was about $1.30 a day last November and $1.70 in March.

If all you want to know is how volatile your stock is, you can stop right here. You now have a tool you can use. Vaya con dios and prosper. If you want to learn a little more about where ATR comes from and what else it can predict, read on…

Gilead is a pretty busy stock, but even so, it’s not often that it moves up twice its ATR or more within two days. It’s even more rare for it to fall that much in two back-to-back days. Now that you’ve seen your first chart. Let’s look at ATR itself a little more closely.

The ATR is calculated over a set period. Usually, it’s a 14-day average of the true range. A “true range” is not a complicated statistic. It is simply how much a stock changes in a day. So it can be calculated as-

• Today’s high minus today’s low (that is, the whole range for today)
• Today’s high minus yesterday’s close (how much it went up since yesterday, if that’s more than today’s range)
• Or today’s low subtracted from yesterday’s close (how much it went down since yesterday if the stock is falling).

You don’t have to struggle with remembering that now that you have an idea what a true range is. It’s just today’s high to low, or the amount it went up or down since yesterday, if that’s a bigger number. Chart software will do all the calculating for you, anyway, but you know enough so this tool is not mysterious anymore. That’s all that’s necessary.

I began looking at ATRs years ago when trying to figure out whether a stock was likely to move enough in the short run to make an option pay off. From looking at hundreds of charts over the years, I developed a seat-of-the-pants notion that two times the ATR was a significant number I could use.

Even on a biotech stock, and much more so with blue chips, it is quite rare for a stock to move its full, current ATR range one day then continue in the same direction for an additional full ATR move the next day. And doing it with no backtracking or overlapping in price for three or four days is exceedingly rare.

It seems that two back-to-back full-ATR moves down (or three up) is about all you can expect from the stock’s normal behavior. After that, the stock usually reverses course or stands still for a while.

This then gives you an idea of what kind of sudden wrong-way movement you might have to put up if you buy a particular stock.

My two-times-ATR rule is just a rule of thumb I developed as one of my personal shortcuts. It has no textbook blessing that I know of. But it seems to have a bit of a pedigree after all.