Beta Definition, Meaning and Example
Beta Definition – A risk measure which examines the degree of fluctuation of a security with respect to change in the stock market indices.
In simple words, it measures the returns that a security has provided when compared to the returns from the stock market. It is also known as the measure of systematic risk or volatility of a security or a portfolio. Sometimes Beta is also known from the name of beta coefficient.
In addition to this, Beta is also used in Capital Asset Pricing Model to assess the expected returns from an asset. Beta tells how much change in security price or values takes place when the market index changes.
When a regular comparison is made between the returns from a security and benchmark index, a pattern is formed. Analysis of this patters shows the responsiveness of a stock price changes with change in the overall market index. This helps the investor in identifying the security which is more exposed to the risk.
Formula of Beta
Beta = Cov [R(s), R(m)] / Var R(m)
Cov = Covariance
R(s) = Returns from security
R(m) = Returns from market indices.
Example of Beta
To get a clear understanding of Beta definition, let’s discuss an example.
Beta > 1 = security is more volatile than the market.
Beta < 1 means the security is less volatile compared to market.
Beta = 1, means that the returns that the investor is getting from the security is equal to the returns of the market.
Suppose the beta value is 0.85. This implies that it is less that 1 that means volatility in security is less. Now take another value of beta where beta is 1.4. This means that the security is 40 percent more volatile comparatively to market