What is beta?
Beta is a measure of the volatility, or systematic risk, of a security or portfolio in relation to the market. In finance, beta has become the most common measure of risk. It is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns. Beta is also used in other models, such as the three-factor model.
Beta is calculated using regression analysis. The market is the independent variable and the security’s return is the dependent variable. The intercept of the regression line is the security’s return when the market return is zero. The slope of the line is the security’s beta.
Cambridge dictionary
a measurement of how much the value of a particular share has changed in a particular period of time, compared to the average change in the value of shares in the stock market as a whole during that period:
Wikipedia
In finance, the beta (β or market beta or beta coefficient) is a measure of how an individual asset moves (on average) when the overall stock market increases or decreases. Thus, beta is a useful measure of the contribution of an individual asset to the risk of the market portfolio when it is added in small quantity. Thus, beta is referred to as an asset’s non-diversifiable risk, its systematic risk, market risk, or hedge ratio. Beta is not a measure of idiosyncratic risk.
What is beta used for?
A security with a beta of one is just as volatile as the market. A security with a beta of less than one is less volatile than the market, and a security with a beta of more than one is more volatile than the market.
Some investors use beta as a measure of how risky a security is. A higher beta means more risk. But beta is only one measure of risk. There are other risks that are not captured by beta, such as company-specific risks and market risks.
