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Investing Glossary:
Beta
Copyright 2009,
Campbell R. Harvey. All Rights Reserved.
Do not reproduce without explicit permission.
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| Term: |
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| Definition: |
| The measure of an asset`s Risk in relation to the Market (for example, the S&P500) or to an alternative Benchmark or factors. Roughly speaking, a security with a Beta of 1.5, will have move, On average, 1.5 times The Market return. [More precisely, that stock`s excess Return (over and above a short-term Money market rate) is expected to move 1.5 times the market excess return).] According to Asset pricing theory, beta represents the Type of risk, Systematic risk, that cannot be diversified away. When using beta, there are a number of issues that you need to be aware of: (1) betas may change through time; (2) betas may be different depending on the direction of the market (i.e. betas may be greater for down moves in the market rather than Up moves); (3) the estimated beta will be biased if the security does not frequently trade; (4) the beta is not necessarily a Complete measure of risk (you may need multiple betas). Also, Note that the beta is a measure of comovement, not volatility. It is possible for a security to have a zero beta and higher volatility than the market.
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