Beta
Definition
Beta measures the volatility or systematic risk of a security or portfolio relative to the overall market. A beta greater than 1 indicates more volatility than the market, while a beta less than 1 indicates less volatility.
5 Must Know Facts For Your Next Test
- Beta is used in the Capital Asset Pricing Model (CAPM) to determine the expected return of an asset.
- A beta of 1 means the asset's price moves with the market.
- Negative beta indicates an inverse relationship with market movements.
- Beta helps investors understand how much risk they are taking compared to the market.
- Regression analysis often calculates beta by comparing historical returns of a security to those of a benchmark index.
Review Questions
- What does a beta greater than 1 signify about a security's volatility?
- How is beta used in the Capital Asset Pricing Model (CAPM)?
- Can a security have a negative beta? If so, what does it mean?
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Subjects (1)
Related terms
Alpha: A measure of an investment's performance on a risk-adjusted basis, representing the excess return relative to the benchmark index.
Systematic Risk: The risk inherent to the entire market or market segment, also known as non-diversifiable risk.
Standard Deviation: A statistical measure that quantifies the amount of variation or dispersion in a set of values, often used to assess investment risk.
