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

1. Beta is used in the Capital Asset Pricing Model (CAPM) to determine the expected return of an asset.
2. A beta of 1 means the asset's price moves with the market.
3. Negative beta indicates an inverse relationship with market movements.
4. Beta helps investors understand how much risk they are taking compared to the market.
5. 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?

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.