Beta (finance)

betabeta coefficient beta coefficientBeta decay (finance)Beta is used in financebetaslow-betamarket betasatisfactory returnvolatility beta
In finance, the beta (β or beta coefficient) of an investment is a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic factors.wikipedia
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Capital asset pricing model

CAPMCapital Asset Pricing Model (CAPM)CAPM model
In the capital asset pricing model (CAPM), beta risk is the only kind of risk for which investors should receive an expected return higher than the risk-free rate of interest.
The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.

Alpha (finance)

alphaexcess returnoutperform market averages
where r a is the return of the asset, alpha (α) is the active return, and r b is return of the benchmark.
Alpha, along with beta, is one of two key coefficients in the capital asset pricing model used in modern portfolio theory and is closely related to other important quantities such as standard deviation, R-squared and the Sharpe ratio.

Diversification (finance)

diversificationdiversifieddiversify
Beta is important because it measures the risk of an investment that cannot be reduced by diversification.
Synonyms for non-diversifiable risk are systematic risk, beta risk and market risk.

Systematic risk

unsystematic risknon-diversifiable risksystematic market risk
Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk, or market risk.
An important concept for evaluating an asset's exposure to systematic risk is beta.

Arbitrage pricing theory

APTarbitrage-pricingarbitraged away
The arbitrage pricing theory (APT) has multiple betas in its model.
In finance, arbitrage pricing theory (APT) is a general theory of asset pricing that holds that the expected return of a financial asset can be modeled as a linear function of various factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor-specific beta coefficient.

Security characteristic line

The regression line is then called the security characteristic line (SCL).
The slope of the SCL is the security's beta, and the intercept is its alpha.

Modern portfolio theory

portfolio theoryportfolio analysismean-variance
Both coefficients have an important role in modern portfolio theory.
where α i is called the asset's alpha, β i is the asset's beta coefficient and SCL is the security characteristic line.

Volatility (finance)

volatilityvolatileprice volatility
Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk, or market risk. A beta below 1 can indicate either an investment with lower volatility than the market, or a volatile investment whose price movements are not highly correlated with the market.

Downside beta

downside
An alternative to standard beta is downside beta. The dual-beta model, in contrast, takes into account this issue and differentiates downside beta from upside beta, or downside risk from upside risk, and thus allows investors to make better informed investing decisions. At the industry level, beta tends to underestimate downside beta two-thirds of the time (resulting in value overestimation) and overestimate upside beta one-third of the time resulting in value underestimation.
In investing, downside beta is the element of beta that investors associate with risk in the sense of the uncertain potential for loss.

Dual-beta

The dual-beta model, in contrast, takes into account this issue and differentiates downside beta from upside beta, or downside risk from upside risk, and thus allows investors to make better informed investing decisions.
In investing, dual-beta is a concept that states that a regular, market beta can be divided into downside beta and upside beta.

Upside beta

upside
The dual-beta model, in contrast, takes into account this issue and differentiates downside beta from upside beta, or downside risk from upside risk, and thus allows investors to make better informed investing decisions. At the industry level, beta tends to underestimate downside beta two-thirds of the time (resulting in value overestimation) and overestimate upside beta one-third of the time resulting in value underestimation.
In investing, upside beta is the element of traditional beta that investors do not typically associate with the true meaning of risk.

Linear regression

regression coefficientmultiple linear regressionregression
Then one uses standard formulas from linear regression.
The capital asset pricing model uses linear regression as well as the concept of beta for analyzing and quantifying the systematic risk of an investment.

Downside risk

lossesrisks
The dual-beta model, in contrast, takes into account this issue and differentiates downside beta from upside beta, or downside risk from upside risk, and thus allows investors to make better informed investing decisions. "I find it preposterous that a single number reflecting past price fluctuations could be thought to completely describe the risk in a security. Beta views risk solely from the perspective of market prices, failing to take into consideration specific businessfundamentals or economic developments. The price level is also ignored, as if IBM selling at 50 dollars per share wouldnot be a lower-risk investment than the same IBM at 100 dollars per share. Beta fails to allow for the influence that investorsthemselves can exert on the riskiness of their holdings through such efforts as proxy contests, shareholder resolutions, communications with management, or the ultimate purchase of sufficient stock to gain corporate control and with it direct access to underlying value. Beta also assumes that the upside potential and downside risk of any investment are essentially equal,being simply a function of that investment's volatility compared with that of the market as a whole.
Then, through a theoretical analysis of capital market values, Hogan and Warren demonstrated that 'the fundamental structure of the "capital-asset pricing model is retained when standard semideviation is substituted for standard deviation to measure portfolio risk."' This shows that the CAPM can be modified by incorporating downside beta, which measures downside risk, in place of regular beta to correctly reflect what people perceive as risk.

Betavexity

In investment analysis, betavexity is a form of convexity that is specific to the beta coefficient of a long tailed investment (i.e. mortality risk).

Risk-free interest rate

risk-free raterisk free raterisk-free asset
In the capital asset pricing model (CAPM), beta risk is the only kind of risk for which investors should receive an expected return higher than the risk-free rate of interest.

Treynor ratio

Treynor measure
Taking the equation detailed above, let us assume that the expected portfolio return is 20%, the risk free rate is 5%, and the beta of the portfolio is 1.5.

Hamada's equation

Hamada
It is used to help determine the levered beta and, through this, the optimal capital structure of firms.

Finance

financialfinancesfiscal
In finance, the beta (β or beta coefficient) of an investment is a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic factors.

Investment

Investmentsinvestingcapital investment
In finance, the beta (β or beta coefficient) of an investment is a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic factors.

Market (economics)

marketmarketsmarket forces
In finance, the beta (β or beta coefficient) of an investment is a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic factors.

Market portfolio

realized returnoverall marketportfolio
The market portfolio of all investable assets has a beta of exactly 1.

Asset

assetstotal assetstangible asset
Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk, or market risk. The market portfolio of all investable assets has a beta of exactly 1.