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To calculate beta, investors divide the covariance of an individual stock (say, Apple) with the overall market, often represented by the Standard & Poor’s 500 Index, by the variance of the ...
A stock with a high beta indicates it's more volatile than the overall market and can react with dramatic share-price changes amid market swings. … Continue reading ->The post What Is Beta?
If a stock has a beta of 1.2, it might be considered 20 percent riskier than the benchmark and therefore should compensate investors with a higher expected return. If the index returned 10 percent ...
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 ...
The security could be any asset, such as stocks, bonds, or derivatives. The theoretical return is predicted by a market model, most commonly the capital asset pricing model (CAPM). The market model uses statistical methods to predict the appropriate risk-adjusted return of an asset. The CAPM for instance uses beta as a multiplier.
The term () represents the movement of the market modified by the stock's beta, while represents the unsystematic risk of the security due to firm-specific factors. Macroeconomic events, such as changes in interest rates or the cost of labor, causes the systematic risk that affects the returns of all stocks, and the firm-specific events are the ...
The average investor may not be familiar with what beta means, but they are no doubt fully aware of what it represents. Although there are different types of risk in the market, a stock's beta...
When used in portfolio management, the SML represents the investment's opportunity cost (investing in a combination of the market portfolio and the risk-free asset). All the correctly priced securities are plotted on the SML. The assets above the line are undervalued because for a given amount of risk (beta), they yield a higher return.