Beta (β)
The beta of an asset is calculated as the covariance between expected returns on the asset and the market, divided by the variance of expected returns on the market. The relationship between beta and the expected market sensitivity is as follows: β = 0: No Market Sensitivity. β < 1: Low Market Sensitivity.
What is beta in the CAPM formula?
Beta (β), primarily used in the capital asset pricing model (CAPM), is a measure of the volatility–or systematic risk–of a security or portfolio compared to the market as a whole.
How do you calculate beta?
Beta can be calculated by dividing the asset's standard deviation of returns by the market's standard deviation. The result is then multiplied by the correlation of the security's return and the market's return.
Does CAPM use beta?
The beta (β) of an investment security (i.e., a stock) is a measurement of its volatility of returns relative to the entire market. It is used as a measure of risk and is an integral part of the Capital Asset Pricing Model (CAPM).
What does a beta of 1.33 mean?
This helps the investor to decide whether he wants to go for the riskier stock that is highly correlated with the market (beta above 1), or with a less volatile one (beta below 1). For example, if a stock's beta value is 1.3, it means, theoretically this stock is 30% more volatile than the market.