beta

(adjective)

In finance, the Beta (β) of a stock or portfolio is a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to.

Related Terms

(noun)

Average sensitivity of a security's price to overall securities market prices.

Related Terms

Examples of beta in the following topics:

  • Beta Coefficient for Portfolios

    • A portfolio's Beta is the volatility correlated to an underlying index.
    • A portfolio's Beta is the volatility correlated to an underlying index.
    • What would the following portfolios have for Beta values?
    • Thus, the portfolio would have a Beta value of 3.
    • Two hypothetical portfolios; what do you think each Beta value is?

  • Expected Risk and Risk Premium

    • Systematic risk can be understood further using the measure of Beta.
    • Betas less than 0: Asset generally moves in the opposite direction as compared to the index.
    • Betas equal to 0: Movement of the asset is uncorrelated with the movement of the benchmark.
    • Beta is a measure that relates the rate of return of an asset, ra, with the rate of return of a benchmark, rb.
    • Use a stock's beta to estimate a stock's daily growth or decline.

  • Overview of How to Assess Stand-Alone Risk

    • Total Beta is a measure used to determine risk of a stand-alone asset, as opposed to one that is a part of a well-diversified portfolio.
    • Recall that Beta is a number describing the correlated volatility of an asset or investment in relation to the volatility of the market as a whole.
    • Total Beta is a measure used to determine the risk of a stand-alone asset, as opposed to one that is a part of a well-diversified portfolio.
    • It is able to accomplish this because the correlation coefficient, R, has been removed from Beta.
    • Total Beta can be found using the following formula:

  • Making Risk Adjustments

    • It is possible to make such adjustments by figuring the differing risk into the company's beta .
    • The beta coefficient, expressed as a covariance, is the risk of a new project in relation to the risk of the market as a whole.
    • A company itself will be considered, for investment purposes, as a "portfolio of assets," and its beta coefficient will represent the weighted average of each "asset's" beta.
    • Therefore, if a new project of differing risk is undertaken, the beta for that project will be weighted into the company's overall cost of capital.
    • The beta of an investment is equal to the covariance between the rate of return of the investment, r(a), and that of the portfolio, r(p).

  • Measuring and Protecting against Economic Exposure

    • Consequently, this equation estimates a straight line between P and S with an intercept of ($\alpha$) and a slope of ($\beta$).We refer the parameter ($\beta$) as the Forex Beta or Exposure Coefficient, and it indicates the exposure level.
    • We calculate 800 for ($\beta$) in this case.
    • In Table 2, we show ($\beta$) is the correct hedge for Case 1.
    • However, the ($\beta$) equals 0 in this case because the rent in euros does not vary.
    • The Beta is the Correct Hedge for Case 1

  • The SML Approach

    • The beta of the security is 1.9.
    • The Security Market Line (SML) is the graphical representation of the capital asset pricing model (CAPM), with the x-axis representing the risk (beta), and the y-axis representing the expected return.
    • It graphs the relationship between beta (β) and expected return, i.e. it shows expected return as a function of β.
    • The Security Market Line for the Dow Jones Industrial Average over a 3 year period, with the x-axis representing beta and the y-axis representing expected return.

  • Measuring Risk

    • Beta is a measure firms can use in order to determine an investment's return sensitivity in relation to overall market risk.
    • Beta describes the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to.
    • Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk, or market risk.
    • Higher-beta investments tend to be more volatile and therefore riskier, but provide the potential for higher returns.
    • Lower-beta investments pose less risk, but generally offer lower returns.

  • Risk and Return Considerations

    • Beta is a measure firms can use in order to determine an investment's return sensitivity in relation to overall market risk.
    • Beta describes the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to.
    • Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk, or market risk.
    • Higher-beta investments tend to be more volatile and therefore riskier, but provide the potential for higher returns.
    • Lower-beta investments pose less risk, but generally offer lower returns.

  • The Capital Asset Pricing Model

  • Fama-French Three-Factor Model

    • Beta, bs, and bv are coefficients, and alpha is an error term.