What is Beta?

Beta is the statistical index of the volatility or sensitivity of a portfolio or security’s price changes to changes in the value of the overall market or assets as a whole. Beta is also known as, “beta coefficient”.

Beta is generally used in the Capital Asset Pricing Model or CAPM, which is a model used to calculate an asset’s expected rate of return based on expected market returns and its beta coefficient.

Beta is determined using the regression analysis, where beta is assumed as the trend of the security’s expected returns to react to changes in the market. A beta of 1 shows that, the security or asset’s price will move in the market’s direction. A beta below 1 indicates that the security’s volatility is less than the market. If a security’s beta is higher than 1, indicates that the security’s value will be very sensitive than the market.
For example, if a stock has a beta of 1.3, theoretically this indicates the stock is 30% more volatile than the market.

Most utilities stocks have betas below 1. In contrast, high-tech firms, stocks traded in NASDAQ, possess a beta more than 1, which gives the prospects of higher return but with greater risks.


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