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.
What is the range of beta in CAPM model?
Hence, a stock with a beta of greater than 1 is riskier than the general market, but potentially more profitable; a beta of less than 1 is generally less risky than the general market, and gains will also probably be less than market gains. Most stocks have betas than range from 0.5 − 1.75.
How is beta calculated in CAPM?
Beta could be calculated by first dividing the security's standard deviation of returns by the benchmark's standard deviation of returns. The resulting value is multiplied by the correlation of the security's returns and the benchmark's returns.
Why is beta 1 in CAPM?
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.