The sensitivity of a stock‘s return to the return on a relevant market index. However, securities may not be confined to one beta, especially in dramatically varying market conditions. More specifically, a stock could have different betas in up and down markets.
To calculate beta, regression analysis is usually used. A beta of 1.0 indicates that the stock price goes hand in hand with the whole market. A beta lower than 1 means that the security would be less risky than the market. A beta bigger than 1 predicts that the security’s price would be riskier than the market. A zero-beta security is a free-risk asset that is virtually in isolation of broad market movements, and consequently suffers no fluctuations in value or return. The beta of most high-tech stocks is greater than one, making both their risk and return higher than that of the market portfolio.
Comments