Premium Essay

Submitted By sunflower26nt

Words 2667

Pages 11

Words 2667

Pages 11

In finance, the beta (β) of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole.[1]

An asset with a beta of 0 means that its price is not at all correlated with the market. A positive beta means that the asset generally follows the market. A negative beta shows that the asset inversely follows the market; the asset generally decreases in value if the market goes up and vice versa.[2]

The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset's statistical variance that cannot be mitigated by the diversification provided by the portfolio of many risky assets, because it is correlated with the return 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

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* 1 Definition o 1.1 Securities market line * 2 Beta volatility and correlation * 3 Choice of benchmark * 4 Investing * 5 Academic theory * 6 Multiple beta model * 7 Estimation of beta * 8 Extreme and interesting cases * 9 Criticism * 10 See also * 11 Notes * 12 External links

[edit] Definition

The formula for the beta of an asset within a portfolio is

\beta_a = \frac {\mathrm{Cov}(r_a,r_p)}{\mathrm{Var}(r_p)} ,

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 risky assets, and so the rp terms in the formula are replaced by rm, the rate of return of the market.

Beta is also referred to as financial elasticity or correlated relative volatility, and can be…...