What does Beta mean?
Beta measures the volatility, or otherwise the systematic risk, of any type of security or portfolio, comparing them to the market as a whole. This measure is used in something called the capital asset pricing model, or CAPM for short, which calculates the general expected return of assets, based on their expected market returns and beta.
Beta is determined by using regression analysis, which can be thought as the tendency of a specific security’s returns in response to the sways in the market. If the beta is determined to be 1, then the security fluctuates at the same rate as the market does. If the beta is determined to be less then 1, then the security fluctuates at a lower rate than the market does. If the beta is determined to be a higher number then 1, then the security fluctuates at a higher rate than the market does. An example would be if a stock has a beta of 1.3, then it can be theorized that the volatility of the security is 30% higher than that of the market.
Most of the utility stocks have their beta under 1. On the other hand, some of the stocks for Nasdaq have a beta greater than 1, which offers the possibility of higher rates on returns, but also poses more risks.
For example, a stock with a high beta will rise in value at a higher rate, than the stock market average of that day when specific shares are rising in general; on the other hand they will also fall more sharply than the stock market average of that day if shares are dropping.
It is basically a measure of the securities market risk, ad it is an indicator of the volatile nature of stocks, relative to a chosen benchmark. Such a benchmark can be, for instance, the Standards & Poor’s 500 composite index, or S&P 500 for short, which is the standard beta value equaling 1.00. Every security has its beta calculated according to their respective market movements, and then published in something called a ‘beta table’ by Standard & Poor’s and Morgan Stanley investment Corporation.
The investors looking for more high risk rewarding ratios usually choose stocks with a high beta, whereas conservative investors normally prefer low beta stocks over the others.
The beta is also called ‘beta coefficient’. |
