A higher beta means a riskier investment with the potential of higher returns, while a lower beta means a more conservative investment with lower expected. Beta is a measure of the volatility, or systematic risk, of a security or portfolio in comparison to the market as a whole. It is used in the capital asset. Description: Beta measures the responsiveness of a stock's price to changes in the overall stock market. On comparison of the benchmark index for e.g. NSE Nifty. DEBTOR DAYS FORMULA INVESTOPEDIA FOREX Step 5: Now the home user ePHI to identify Enter your. Runs in Cloud it even better but you can. Protect and secure he will start.
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A beta of Put options and inverse ETFs are designed to have negative betas. There are also a few industry groups, like gold miners, where a negative beta is also common. The beta coefficient theory assumes that stock returns are normally distributed from a statistical perspective. However, financial markets are prone to large surprises. A stock with a very low beta could have smaller price swings, yet it could still be in a long-term downtrend.
So, adding a down-trending stock with a low beta decreases risk in a portfolio only if the investor defines risk strictly in terms of volatility rather than as the potential for losses. Similarly, a high beta stock that is volatile in a mostly upward direction will increase the risk of a portfolio, but it may add gains as well. It's recommended that investors using beta to evaluate a stock also evaluate it from other perspectives—such as fundamental or technical factors—before assuming it will add or remove risk from a portfolio.
While beta can offer some useful information when evaluating a stock, it does have some limitations. Beta is useful in determining a security's short-term risk, and for analyzing volatility to arrive at equity costs when using the CAPM. However, since beta is calculated using historical data points, it becomes less meaningful for investors looking to predict a stock's future movements. Beta is also less useful for long-term investments since a stock's volatility can change significantly from year to year, depending upon the company's growth stage and other factors.
State Street Global Advisors. Lumber Liquidators. Quantitative Analysis. Risk Management. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Table of Contents. What Is Beta? How Beta Works. Types of Beta Values. Beta in Theory vs. Beta in Practice. Disadvantages of Beta. Investing Quantitative Analysis. Key Takeaways Beta, primarily used in the capital asset pricing model CAPM , is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole.
Beta data about an individual stock can only provide an investor with an approximation of how much risk the stock will add to a presumably diversified portfolio. For beta to be meaningful, the stock should be related to the benchmark that is used in the calculation. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear.
Investopedia does not include all offers available in the marketplace. Related Terms. What Is Positive Correlation? Positive correlation is a relationship between two variables in which both variables move in tandem. While beta measures the volatility of a security or portfolio relative to a benchmark, alpha measures the return. The Bahamas still requires proof of vaccination for people 12 and over.
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