More one reads about the financial market, the deeper you go, the more you get to explore.
Beta is one of the most common financial term and measure, which every analyst uses while doing stock analysis or market analysis.
Beta is a measure of risk; it is also termed as systematic risk as well as performance measure. Beta represents the way stock or the asset class responds to the swings in the market. It shows how the prices move in relation to the market movement.
First understand the calculation of Beta.
Beta is calculated by dividing the covariance of Security’s and benchmark’s return by variance of the benchmark’s return. Benchmark could be anything, but usually it is taken as overall market.
Interpreting BETA
Market is assumed to have Beta 1.
If any stock has a beta of 1, it means it perfectly copies the movement of the market. Let say if market rise by 1%, proportionately stock will also rise by 1%. It also means the stocks volatility matches with market volatility.
If beta is above one says, it is 1.3, then the stock is reportedly have high volatility than the market. To be precise, the stock will have 30% higher volatility than the market.
If the beta is less than one, the stock has lesser volatility than the market. We can also say that the stock with less than 1 beta is not highly affected by market adversities. Mostly the treasury bills have lower beta, as they are not much affected by market movement as they are controlled and regulated by financial institution of the country and are being backed by the government.
If BETA is negative, it means, that the stock or your asset moves in opposite direction from the market’s move.
If BETA is 0, that doesn’t make the stock risk free, it just it doesn’t share any correlation with market. So the stock will pave its own path and will not follow the market’s movement.
Anyone seeking higher return shouldn’t go for with lower BETA, as lower beta means less volatility less risk thus lesser return. It just the simple fund of higher the risk higher the return, then lower the risk lower return.
Uses of BETA
Beta as a financial concept is being used by portfolio managers, hedge…
Just trying to save you time, in case you're considering adding more such content.
There is a decent definition of beta (and many other fundamental data items) here - https://www.stockopedia.com/ra...
For convenience I have pasted the Beta definition for you below...
What is the definition of Beta?
Beta is a measure of a company's common stock price volatility relative to the market. It is calculated as the slope of the 60 month regression line of the percentage price change of the stock relative to the percentage price change of the relevant index (e.g. the FTSE All Share). Beta values are not calculated if less than 24 months of pricing is available.
According to asset pricing theory, beta represents the type of risk, systematic risk, that cannot be diversified away. By definition, the market itself has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the macro market. A stock with a beta of 2 has returns that change, on average, by twice the magnitude of the overall market's returns; when the market's return falls or rises by 3%, the stock's return will fall or rise (respectively) by 6% on average.
When using beta, there are a number of issues that you need to be aware of: (1) betas may change through time; (2) betas may be different depending on the direction of the market; (3) the estimated beta will be biased if the security does not frequently trade; (4) the beta is not necessarily a complete measure of risk, 5) the beta is a measure of co-movement, not volatility. It is possible for a security to have a zero beta and higher volatility than the market.
Theoretically, higher-beta stocks tend to be more volatile and therefore riskier, but provide the potential for higher returns. Some have challenged this idea, claiming that the data show little relation between beta and potential reward.
Hope it helps!
