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Beta Coefficient Formula:
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The Beta coefficient (β) is a measure of an asset's systematic risk in finance, representing how much the asset's returns move relative to market returns. It quantifies the sensitivity of an asset's returns to market movements.
The calculator uses the Beta coefficient formula:
Where:
Explanation: Beta measures how much an asset's price moves relative to the overall market. A beta of 1 indicates the asset moves with the market, while beta > 1 suggests higher volatility and beta < 1 indicates lower volatility.
Details: Beta is crucial for portfolio management, risk assessment, and the Capital Asset Pricing Model (CAPM). It helps investors understand an asset's risk profile and expected returns relative to market movements.
Tips: Enter covariance between asset and market returns (%), and variance of market returns (%). Variance must be greater than zero. All values should be expressed as percentages.
Q1: What does a beta of 1.5 mean?
A: A beta of 1.5 means the asset is 50% more volatile than the market. If the market moves 10%, the asset typically moves 15%.
Q2: What is considered a high beta?
A: Typically, beta > 1.2 is considered high, indicating higher volatility than the market. Beta < 0.8 is considered low volatility.
Q3: Can beta be negative?
A: Yes, negative beta indicates the asset moves in the opposite direction of the market. This is rare but can occur with certain defensive assets.
Q4: How is beta used in CAPM?
A: In CAPM, beta determines the risk premium: Expected Return = Risk-Free Rate + β × (Market Return - Risk-Free Rate).
Q5: What are the limitations of beta?
A: Beta assumes normal market conditions, may not capture extreme events, and is based on historical data which may not predict future performance accurately.