Beta is a measure of the systematic risk of an individual stock. Beta measures the sensitivity of a stocks return against the return on the market. A beta of 1 means the stock is as equally sensitive as the market. A beta greater than one means the stock is more sensitive than the market. A beta of less than one means the stock is less sensitive than the market. For example, a beta of 1.5 means that on average when the market rises or falls by 1%, the stock will rise or fall by 1.5%
- In finance, the higher the risk of an asset, the greater the return. For example, a bank bill is less risky than a share in Telecom. Therefore the expected return on a Telecom stock will be greater than that on a bank bill.
- However, because an investor can eliminate unique risk simply by diversifying, we are only compensated for the systematic risk of a stock.
- Therefore to measure the expected return of a stock, we use Beta.
How is Beta measured?
To determine the beta of a stock we plot the daily, weekly or monthly return of the market with the daily, weekly or monthly return of the individual stock. The slope of the “line of best fit” measures beta.
How is Beta measured?
To determine the beta of a stock we plot the daily, weekly or monthly return of the market with the daily, weekly or monthly return of the individual stock. The slope of the “line of best fit” is beta.