Beta
The beta (β) is a statistical measure of market risk on a portfolio. The beta has traditionally been used to estimate the elasticity of a stock portfolio's return relative to the market index. A beta of 0.7 means the total return of the security is likely to move up or down 70% of the market change; 1.3 means total return is likely to move up or down 30% more than the market. Beta is referred to as an index of the systematic risk due to general market conditions that cannot be diversified away. |
Similar financial terms
Zero-beta portfolioA zero-beta portfolio is constructed to have zero systematic risk, similar to the risk-free asset, that is, having a beta of zero. (i.e. in most cases, we assume the beta of debt to be zero).
Unleveraged beta
The beta of an unleveraged required return (i.e. no debt) on an investment when the investment is financed entirely by equity.
Leveraged beta
The beta of a leveraged required return; that is, the beta as adjusted for the degree of leverage in the firm's capital structure.
Beta equation
The beta of a security is determined as follows:
[(n) (sum of (xy)) ]-[ (sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[ (sum of x) (sum of x)]
where: n = # of observations (36 months)
x = rate of return for a benchmark index
y = rate of return for the security
Country beta
Covariance of a national economy's rate of return and the rate of return the world economy divided by the variance of the world economy.
