Beta Coefficient
Beta coefficient measures systematic risk relative to the market. Beta of 1 means it moves with the market, greater than 1 means more volatile, less than 1 means less volatile.
Exam Tip
Beta = 1 moves with market. >1 = more volatile. <1 = less volatile. Uses MARKET as benchmark. Cannot be diversified away.
What is Beta Coefficient?
Beta measures systematic (market) risk - the volatility of an investment relative to the overall market.
Beta Values
| Beta | Meaning | Example |
|---|---|---|
| 1.0 | Moves with market | S&P 500 index fund |
| >1 | More volatile | Tech stocks (beta 1.3-1.5) |
| <1 | Less volatile | Utilities (beta 0.4-0.6) |
| 0 | No correlation | Some hedge funds |
| <0 | Inverse movement | Gold (sometimes) |
Use in CAPM
Expected Return = Rf + Beta(Rm - Rf)
Beta vs Standard Deviation
- Beta = SYSTEMATIC risk only
- Standard Deviation = TOTAL risk
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Alpha (Jensen's Alpha)
Alpha measures excess return relative to CAPM prediction, indicating manager skill in adding (positive alpha) or losing (negative alpha) value.
Systematic Risk (Market Risk)
Systematic risk is the inherent risk that affects the entire market or asset class, which cannot be eliminated through diversification and includes factors like interest rates, inflation, and recessions.
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