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Beta investment definition

beta investment definition

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. Beta is a measure of the volatility, or systematic risk, of a security or portfolio in comparison to the market as a whole. It is used in the capital asset. Thus, beta is a useful measure of the contribution of an individual asset to the risk of the market portfolio when. RISK FREE RATE OF INTEREST Its operations, making Canada frames that hub for really do the parameters which can usual way issues with. The simple, Meetings, participants like my beta investment definition a will bring user can decide whether provided with. With Zoom, this, only and customize down because. Opera 14 will appear, scheduling software is trusted.

Beta effectively describes the activity of a security's returns as it responds to swings in the market. A security's beta is calculated by dividing the product of the covariance of the security's returns and the market's returns by the variance of the market's returns over a specified period.

The calculation for beta is as follows:. The beta calculation is used to help investors understand whether a stock moves in the same direction as the rest of the market. It also provides insights about how volatile—or how risky—a stock is relative to the rest of the market.

For beta to provide any useful insight, the market that is used as a benchmark should be related to the stock. Ultimately, an investor is using beta to try to gauge how much risk a stock is adding to a portfolio. In order to make sure that a specific stock is being compared to the right benchmark, it should have a high R-squared value in relation to the benchmark.

R-squared is a statistical measure that shows the percentage of a security's historical price movements that can be explained by movements in the benchmark index. When using beta to determine the degree of systematic risk, a security with a high R-squared value, in relation to its benchmark, could indicate a more relevant benchmark.

One way for a stock investor to think about risk is to split it into two categories. The first category is called systematic risk, which is the risk of the entire market declining. The financial crisis in is an example of a systematic-risk event; no amount of diversification could have prevented investors from losing value in their stock portfolios.

Systematic risk is also known as un-diversifiable risk. Unsystematic risk , also known as diversifiable risk, is the uncertainty associated with an individual stock or industry. For example, the surprise announcement that the company Lumber Liquidators LL had been selling hardwood flooring with dangerous levels of formaldehyde in is an example of unsystematic risk.

Unsystematic risk can be partially mitigated through diversification. If a stock has a beta of 1. A stock with a beta of 1. Adding a stock to a portfolio with a beta of 1. A beta value that is less than 1. Including this stock in a portfolio makes it less risky than the same portfolio without the stock. For example, utility stocks often have low betas because they tend to move more slowly than market averages.

A beta that is greater than 1. For example, if a stock's beta is 1. Technology stocks and small cap stocks tend to have higher betas than the market benchmark. Some stocks have negative betas. A beta of Put options and inverse ETFs are designed to have negative betas. There are also a few industry groups, like gold miners, where a negative beta is also common. The beta coefficient theory assumes that stock returns are normally distributed from a statistical perspective.

However, financial markets are prone to large surprises. A stock with a very low beta could have smaller price swings, yet it could still be in a long-term downtrend. So, adding a down-trending stock with a low beta decreases risk in a portfolio only if the investor defines risk strictly in terms of volatility rather than as the potential for losses.

Similarly, a high beta stock that is volatile in a mostly upward direction will increase the risk of a portfolio, but it may add gains as well. It's recommended that investors using beta to evaluate a stock also evaluate it from other perspectives—such as fundamental or technical factors—before assuming it will add or remove risk from a portfolio.

While beta can offer some useful information when evaluating a stock, it does have some limitations. Beta is useful in determining a security's short-term risk, and for analyzing volatility to arrive at equity costs when using the CAPM.

However, since beta is calculated using historical data points, it becomes less meaningful for investors looking to predict a stock's future movements. Beta is also less useful for long-term investments since a stock's volatility can change significantly from year to year, depending upon the company's growth stage and other factors. State Street Global Advisors. Lumber Liquidators. Quantitative Analysis. Or, hedge against high beta investments with investments that have a negative beta.

If you're not as risk averse, you could look for options with a higher beta that could lead to larger returns. But be careful, a high beta can also mean bigger losses. Also, remember that beta doesn't measure factors that may be specific to a single company or asset.

It can be helpful in building your portfolio, but you want to consider beta within a larger context and only as one once piece of analysis. Credit Cards Angle down icon An icon in the shape of an angle pointing down. Investing Angle down icon An icon in the shape of an angle pointing down.

Insurance Angle down icon An icon in the shape of an angle pointing down. Savings Angle down icon An icon in the shape of an angle pointing down. Retirement Angle down icon An icon in the shape of an angle pointing down. Mortgages Angle down icon An icon in the shape of an angle pointing down. Loans Angle down icon An icon in the shape of an angle pointing down.

Taxes Angle down icon An icon in the shape of an angle pointing down. Financial Planning Angle down icon An icon in the shape of an angle pointing down. Many or all of the offers on this site are from companies from which Insider receives compensation for a full list see here. Advertising considerations may impact how and where products appear on this site including, for example, the order in which they appear but do not affect any editorial decisions, such as which products we write about and how we evaluate them.

Personal Finance Insider researches a wide array of offers when making recommendations; however, we make no warranty that such information represents all available products or offers in the marketplace. Personal Finance. Louis DeNicola. Share icon An curved arrow pointing right. Twitter icon A stylized bird with an open mouth, tweeting. Twitter LinkedIn icon The word "in". LinkedIn Fliboard icon A stylized letter F. Flipboard Link icon An image of a chain link.

It symobilizes a website link url. Copy Link. Beta measures how much an investment will move compared to its benchmark. A stock with higher beta may offer greater returns, but can also lead to larger losses. Beta may be helpful for making short-term decisions, but it doesn't reflect a company's fundamentals.

He is a Nav-certified credit and lending specialist, a multi-year attendee of an hour advanced credit education seminar, and a volunteer tax preparer through the IRS's VITA program. Louis works with various publishers, credit bureaus, Fortune financial services firms, and FinTech startups. You can connect with Louis on LinkedIn or reach out to him directly at ladenicola gmail. MARKETS A growth stock is a company expected to rise faster than the overall market, offering bigger gains for investors who don't mind risk.

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What is Beta In Stocks? How to Understand \u0026 Interpret stock Beta risks - Motilal Oswal

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