Financial modelling terms explained

Beta Coefficient

Beta coefficient is a measure of the sensitivity of a stock's price to overall market movements. Beta is calculated by dividing the market beta of a security (or a portfolio) by the overall market beta.

What Is a Beta Coefficient?

The beta coefficient is a measure of a security's or portfolio's sensitivity to market movements. It is a statistic that is calculated using regression analysis and is used to estimate the risk of a security or portfolio. The beta coefficient measures the volatility of a security or portfolio in relation to the market. A beta of 1 indicates that the security or portfolio moves with the market. A beta of less than 1 indicates that the security or portfolio is less volatile than the market. A beta of greater than 1 indicates that the security or portfolio is more volatile than the market.

How Do You Calculate a Beta Coefficient?

A beta coefficient is a measure of a security's systematic risk relative to the market. It is calculated using regression analysis and is expressed as a number between -1 and 1. A beta of 1 indicates that the security's price moves with the market. A beta of 0 indicates that the security's price does not move with the market. A beta of -1 indicates that the security's price moves in the opposite direction of the market.

The beta coefficient can be used to calculate a security's expected return. The expected return is the return that is expected to be earned on an investment in the security over a period of time. It is calculated by multiplying the security's beta coefficient by the market's expected return.

For example, suppose that the market's expected return is 10% and a security's beta coefficient is 1.5. The expected return on the security is 15% (10% x 1.5).

What is a Beta Coefficient Used For?

A beta coefficient is used as a measure of a security's or portfolio's systematic risk as compared to the market. The beta coefficient is calculated as the covariance of the security's or portfolio's returns with the market's returns, divided by the variance of the market's returns. The beta coefficient can be used to help investors understand the level of risk associated with a particular security or portfolio and to help make informed investment decisions.

What is a Beta Coefficient?

Beta coefficient is a measure of the systematic risk of a security or a portfolio in comparison to the market. It is calculated as the covariance of the security's returns with the returns of the market divided by the variance of the market. A beta of 1 indicates that the security's returns move exactly with the market. A beta of less than 1 indicates that the security's returns are less volatile than the market and a beta of greater than 1 indicates that the security's returns are more volatile than the market.

What is a Good Beta?

A good beta is one that is indicative of a stock's risk and volatility. A beta of 1 is considered to be average, while a beta below 1 is considered to be less risky and a beta above 1 is considered to be more risky.

What is a Bad Beta?

A Bad Beta is a measure of a security's volatility that is relative to the market as a whole. A security with a high Bad Beta will be more volatile than the market as a whole, while a security with a low Bad Beta will be less volatile than the market.

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