Beta (finance)
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In finance, the Beta (β) of a stock or portfolio is a number describing the volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to. This benchmark is generally the overall financial market and is often estimated via the use of representative indices, such as the S&P 500.[1]
An asset has a Beta of zero if its returns change independently of changes in the market's returns. A positive beta means that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the asset's returns generally move opposite the market's returns: one will tend to be above its average when the other is below its average.[2]
It measures the part of the asset's statistical variance that cannot be removed by the diversification provided by the portfolio of many risky assets, because of the correlation of its returns with the returns of the other assets that are in the portfolio. Beta can be estimated for individual companies using regression analysis against a stock market index. Contents[hide] * 1 Definition * 1.1 Security market line * 2 Choice of benchmark * 3 Investing * 4 Academic theory * 5 Multiple beta model * 6 Estimation of beta * 7 Extreme and interesting cases * 8 Criticism * 9 See also * 10 Notes * 11 External links |
[edit] Definition
The formula for the beta of an asset within a portfolio is

where ra measures the rate of return of the asset, rp measures the rate of return of the portfolio, and cov(ra,rp) is the covariance between the rates of return. The portfolio of interest in the CAPM formulation is the market portfolio that contains all