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Beta is the hedge ratio of an investment with respect to the stock market. For example, to hedge out the market-risk of a stock with a market beta of 2.0, an investor would short $2,000 in the stock market for every $1,000 invested in the stock. Thus insured, movements of the overall stock market no longer influence the combined position on ...
Using beta to evaluate a stock’s risk. Beta allows for a good comparison between an individual stock and a market-tracking index fund, but it doesn’t offer a complete portrait of a stock’s ...
A stock’s beta doesn’t tell investors exactly how it is going to trade, but it is a good gauge of how volatile it will be against various market backdrops. Investors looking to leverage their ...
Continue reading → The post How to Calculate the Beta of a Portfolio appeared first on SmartAsset Blog. Investors, whether beginner or seasoned professionals, all have a threshold for risk. Some ...
These equations show that the stock return is influenced by the market (beta), has a firm specific expected value (alpha) and firm-specific unexpected component (residual). Each stock's performance is in relation to the performance of a market index (such as the All Ordinaries). Security analysts often use the SIM for such functions as ...
A riskier stock will have a higher beta and will be discounted at a higher rate; less sensitive stocks will have lower betas and be discounted at a lower rate. In theory, an asset is correctly priced when its observed price is the same as its value calculated using the CAPM derived discount rate.
Security characteristic line Positive abnormal return (α): Above-average returns that cannot be explained as compensation for added risk Negative abnormal returns (α): Below-average returns that cannot be explained by below-market risk
The benchmark for beta is the S&P 500, which has a beta of 1.0. A stock with a beta higher than 1.0 is more volatile than the market; a stock with a beta lower than 1.0 is less volatile than the ...