Beta meaning

Beta is a measure of beta meaning risk arising from exposure to general market movements as opposed to idiosyncratic factors. The market portfolio of all investable assets has a beta of exactly 1. 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 beta meaning market. An example of the first is a treasury bill: An example of the second is gold.

The beta meaning of gold does go up and down a lot, but not in the same direction or at the same time as the market. A beta greater beta meaning 1 generally means that the asset both is volatile and tends to move up and down with the market. An example is a stock in a big technology company. Negative betas are possible for investments that tend to go down when the market goes up, and vice versa.

There are few fundamental investments with consistent and significant negative betas, but some derivatives like put options can have large negative betas. Beta is important because it measures the risk of an investment that cannot be reduced by diversification.

It does not measure the risk of an beta meaning held on a stand-alone basis, but the amount of risk the investment adds to an already-diversified portfolio.

In the Capital Beta meaning Pricing Model CAPMbeta risk is the only kind of risk for which investors should receive an expected return higher than the risk-free rate of interest. The definition above covers only theoretical beta. The term is used in many related ways in finance. For example, the betas commonly quoted in mutual fund analyses generally measure the risk of the fund arising from exposure to a benchmark for the fund, rather than from exposure to the entire market portfolio.

Thus they measure the amount of risk the fund adds to a diversified portfolio of funds of the same type, rather than to a portfolio diversified among all fund types. It is an example of regression toward the mean. A statistical estimate of beta is calculated by a regression method. For a given asset and a benchmark, the goal is to find an approximate formula.

Since practical data are typically available as a discrete time series of samples, the statistical model is. By using the relationships between standard deviation, variance and correlation: If beta meaning refers to the investment and b refers to the market, it now becomes clear that the interpretation of beta as 'the volatility of an investment relative to the market volatility' is inconsistent with how beta is calculated; this is due to the presence of the correlation in the above formula.

Beta can be computed for prices in beta meaning past, beta meaning the data is known, which is historical beta. However, what most people are beta meaning in is future betawhich relates to risks going forward.

Estimating future beta is a difficult problem. One guess is that future beta equals historical beta. From this, we find that beta can be explained as "correlated relative volatility".

This has three components:. Beta meaning is also referred to as financial elasticity or correlated relative volatilityand can be referred to as a measure of the sensitivity of the asset 's returns to market returns, its non-diversifiable riskits systematic riskor market risk.

On an individual asset level, measuring beta can give clues to volatility and liquidity in the marketplace. In fund management, measuring beta is thought to separate a manager's skill from his or her willingness to take risk. The portfolio of interest in the CAPM formulation is the market portfolio that contains all risky assets, and so the r b terms in the formula are replaced by r mthe rate of return of the market.

The regression line is then beta meaning the security characteristic line SCL. Both coefficients have an important role in modern portfolio theory. Because this higher return beta meaning theoretically possible merely by taking a leveraged position in the beta meaning market to double the beta so it is exactly 2. Beta meaning one of the managers' portfolios has an average beta of 3. Whether investors can expect the second manager to duplicate that performance in beta meaning periods is of course a different question.

The x -axis represents the risk betaand the y -axis represents the expected return. The market risk premium is determined from beta meaning slope of the SML. The security market line can be regarded as representing a single-factor model of the asset price, where beta beta meaning exposure to changes in value of the market.

The equation of the SML, giving the expected value of the return on asset iis thus:. It is a useful tool in determining if an asset being considered for a portfolio offers a reasonable expected return for risk.

Individual securities are plotted on the SML graph. Beta meaning the security's risk versus expected return is plotted above the SML, beta meaning is beta meaning because the investor can expect a greater return for the inherent risk. A security plotted below the SML is overvalued because the investor would be accepting a lower return beta meaning the amount of risk assumed.

The benchmark is often chosen to be similar to the assets chosen by the investor. In practice a standard index is used. The choice of the index need not reflect the portfolio under question; e.

The restriction to stocks as beta meaning benchmark is somewhat arbitrary. A model portfolio may be stocks plus bonds. Sometimes the market is defined as "all investable assets" see Roll's critique ; unfortunately, this includes lots of things for which returns may be hard to measure.

A stock whose returns vary more than the market's returns over time can have a beta whose absolute value is greater than 1. A stock whose returns vary less than the market's returns has a beta with an absolute value less than 1. However, because beta also depends on the correlation of returns, there can be considerable variance about that average; the higher the correlation, the less variance; the lower the correlation, the higher the variance. Beta can also be negative, meaning the stock's returns tend to beta meaning in the opposite direction of the market's returns.

Higher-beta stocks tend to be more volatile and therefore riskier, but provide the potential for higher returns. Lower-beta stocks beta meaning less risk but generally offer lower returns. Some beta meaning challenged this idea, claiming that beta meaning data show little relation between beta and potential reward, or even that lower-beta stocks are both less risky and more profitable contradicting CAPM.

Suppose an investor has all his money in an asset class X and beta meaning to move a small amount to an asset class Y. For example, X could be U. Then the new portfolio, Z, can be expressed symbolically. This assumes that variance is an accurate measure of risk, which is usually good. However, the beta does need to be computed with respect to what the investor currently owns.

Academic theory claims that higher-risk investments should have higher returns over the long-term. Wall Street has a saying that "higher return requires higher beta meaning, not that a risky investment will automatically do better.

Some things may just be poor investments e. Further, highly rational investors should consider correlated volatility beta instead of simple volatility sigma. Theoretically, a negative beta equity is possible; for example, an inverse ETF should have negative beta to the relevant index. Also, a short position should have opposite beta. Beta meaning expected return on equity, or equivalently, a firm's cost of equitycan be estimated using the capital asset pricing model CAPM.

An indication of the beta meaning riskiness attaching to the returns on ordinary shares. It equates to the asset Beta for an ungeared firm, or is adjusted upwards to reflect the extra riskiness of shares in a geared firm. The arbitrage pricing theory APT has multiple betas in its model. Each risk factor has a corresponding beta indicating the responsiveness of the asset being priced to that risk factor. Multiple-factor models contradict CAPM by claiming that some other factors can influence return, therefore one may find two stocks or funds with equal beta, but one may be a better beta meaning.

To estimate beta, one needs a list of returns for the asset and returns for the index; these returns can be daily, weekly or any period. Then one uses standard formulas from linear regression.

The slope of the fitted line beta meaning the linear least-squares calculation is the beta meaning Beta. The y -intercept is the alpha. Myron Scholes and Joseph Williams provided a model for estimating betas from nonsynchronous data. Beta specifically gives the volatility ratio multiplied by the correlation of the plotted data. To take an extreme example, something may have a beta of zero even though it is highly volatile, provided it is uncorrelated with the market.

The relative volatility ratio described above is actually known as Total Beta at least by appraisers who practice business valuation. Total beta is equal to the identity: Total beta captures the security's risk as a stand-alone asset because the correlation coefficient, R, has been removed from beta beta meaning, rather than part of a well-diversified portfolio. Because appraisers frequently value closely held companies as stand-alone assets, total beta is gaining acceptance in the business valuation industry.

Appraisers can now use total beta in the following equation: Some interpretations of beta are explained in the following table: It measures the part of the asset's beta meaning variance that cannot be removed by the diversification provided by the portfolio of many risky assets, because of the correlation of its returns with the returns of the other assets that are in the portfolio.

Beta can be estimated for individual companies using regression analysis against a stock market index. An alternative beta meaning standard beta is downside beta. Beta is always measured in respect to some benchmark. Therefore, an asset may have different betas depending on which benchmark is used.

Just a number is useless if the benchmark is not known. Seth Klarman of the Baupost group beta meaning in Margin of Safety: Beta views risk solely from the perspective of market prices, failing to take into consideration specific business fundamentals or economic developments.

The price level is beta meaning ignored, as if IBM selling at 50 dollars per share would beta meaning be a lower-risk investment than the same IBM at beta meaning per share. Beta fails to allow for the influence that investors themselves can exert on the riskiness of their holdings through such efforts as proxy contestsshareholder resolutions, communications with beta meaning, or the ultimate purchase of sufficient stock to gain corporate control and with it direct access to underlying value.

See beta defined for English-language learners. See beta defined for kids. These example sentences are selected automatically from various online news sources to reflect current usage of the word 'beta. Beta is a measure of a stock 's volatility relative to the overall market. A stock beta meaning beta is determined by analyzing how much its return fluctuates in relation to the overall market return. A stock with a beta of 1.

Stocks with a beta greater than 1. Stocks with betas of zero generally move independently of the broader market. And finally, stocks with negative betas tend beta meaning move in the opposite direction relative to the broader market.

For example, a stock with a beta of 2. The stock would also be expected to gain more in an up market. Beta is a measure of systematic risk. Beta can help investors choose investments that match their specific risk preferences. A risk-averse investor, for example, may want to avoid overweighting their portfolio with high-beta stocks to avoid excessive volatility. Beta meaning stock betas are extremely important when putting together a portfolio of assets. A diversified portfolio consisting of beta meaning with different betas lowers the overall risk of the portfolio.

Investors should note that beta is calculated using past price fluctuations and does not ensure that a security will behave the same going forward. See words that rhyme with beta Spanish Central: Translation of beta Nglish: Translation of beta for Spanish speakers Britannica English: Beta meaning of beta for Arabic speakers Britannica. Encyclopedia article about beta. What made you want to look up beta?

Please tell us where you read or heard it including the quote, if beta meaning. Subscribe to America's largest dictionary and get thousands beta meaning definitions and advanced search—ad free!

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Examples of beta meaning in a Sentence a program that is currently in beta. Acceleron and Celgene are conducting a second Phase 3 clinical trial of luspatercept in patients with beta -thalassemia, another blood disease. Venmo enlisted the opinions of beta card users to develop the plastic, which comes in six different color options. Mice infected with these herpes viruses quickly accumulate beta amyloid plaques, too. While the app has been in the beta stage, it's been tested by some of the teachers' educator friends.

Other Alphabet Terms cuneiformlinearminusculepictographrunesymbologywedge. Recent Examples of beta from the Web But there are also wine betas like my friend Beta meaning, who are knowledgeable but prefer the beta role. This is expressed in a number of ways, most clearly through beta meaning existence of more distinct communities of species beta meaning the sacred groves beta meaning in the control sites this phenomenon is known as beta diversity.

Intel has issued beta patches for these, as well as some of the Arrandale and Clarkdale chips. Cherries are high in antioxidants and vitamin C, beta carotene, potassium, magnesium, iron, fiber and foliate. Hunter's portrayal of Beth, a mother hell-bent on finding the best care and partner for her daughter, grounds beta meaning comedy, while Romano checks his TV shtick to play a beta father struggling with what to do.

Don't forget these Oscar-worthy performances," 18 Oct. First Known Use of beta Other Chemical Engineering Terms alkalicationdecanthygroscopicisotope beta meaning, oxidizeslurrysoluteviscous. What It Is Beta is a measure of a stock 's volatility relative to the overall market. How It Works A stock 's beta is determined by analyzing how beta meaning its return fluctuates in relation to the overall market return. Why It Matters Beta can help investors choose investments that match their specific risk preferences.

Definition of beta for English Language Learners. Learn More about beta See words that rhyme with beta Spanish Central: Seen and Heard What made you want to look up beta? Need even more definitions? Get Word of the Day daily email! Ask the Editors Ghost Word Beta meaning story beta meaning an imaginary word that managed to sneak past our beta meaning and enter beta meaning dictionary. Behind the Scenes How we chose 'feminism' Literally How to use a word that literally drives some people nuts.

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Beta is a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic factors. The market portfolio of all investable assets has a beta of exactly 1.

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.

An example of the first is a treasury bill: An example of the second is gold. The price of gold does go up and down a lot, but not in the same direction or at the same time as the market. A beta greater than 1 generally means that the asset both is volatile and tends to move up and down beta meaning the market. An example is a stock in a big technology company. Negative betas are possible for investments that tend to go down when the market goes beta meaning, and vice versa. There are few fundamental investments with consistent and significant negative betas, but some derivatives like put options can have large negative betas.

Beta is important because it measures the risk of an investment that cannot be reduced by diversification. It does not measure the risk of beta meaning investment held on beta meaning stand-alone basis, but the amount of risk the investment adds to an already-diversified portfolio.

In the Capital Asset Pricing Model CAPMbeta risk is the only kind beta meaning risk for which investors should receive an expected return higher than the risk-free rate of interest. The beta meaning above covers only theoretical beta.

The term is used in many related ways in finance. For example, the betas commonly quoted in mutual fund analyses generally measure the risk of the fund arising beta meaning exposure to a benchmark for the fund, rather than from exposure to the entire market portfolio.

Thus they measure the amount of risk the fund adds to a diversified portfolio of funds of the same type, beta meaning than to a portfolio diversified among all fund types. It is an example of regression toward the mean. A statistical estimate of beta is calculated by a regression method. For a given asset and a benchmark, the goal is to find an approximate formula. Since practical data are typically available as a discrete time series of samples, the statistical model is.

By using the relationships between standard deviation, variance beta meaning correlation: If a refers to the investment and b refers to the market, it now becomes clear that the interpretation of beta as 'the volatility beta meaning an investment relative to the market volatility' is inconsistent with how beta is calculated; this beta meaning due to the presence of the correlation in the above formula. Beta can be computed for prices in the past, where the data is known, beta meaning is historical beta.

However, what most people are interested in beta meaning future betawhich relates to risks going forward. Estimating future beta is a difficult problem. One guess is that future beta beta meaning historical beta. From this, we find that beta can be explained as "correlated relative volatility".

This has three components:. Beta is also referred to as financial elasticity or beta meaning relative volatilityand can be referred to as a measure of the sensitivity of the asset 's returns to market returns, its non-diversifiable riskits systematic riskor market risk.

Both coefficients have an important role in modern portfolio theory. Because this higher return is theoretically possible merely by taking a leveraged position in the broad market to double the beta so it is exactly 2.

If one of the managers' portfolios has an average beta of 3. Whether investors can expect the second manager to duplicate that performance in future periods is beta meaning course a different question. The x -axis represents the risk betaand the y -axis represents the expected return. The market risk premium is determined from the slope of the SML. The security market line can be regarded as representing a single-factor model of the asset price, where beta beta meaning exposure to changes in value of the market.

The equation of the Beta meaning, giving the expected value of the return on asset iis thus:. It is a useful tool in determining if an asset being considered for a portfolio offers a reasonable expected return for risk.

Individual securities are plotted on the SML graph. If the security's risk versus expected return is plotted above the SML, it is undervalued because the investor can expect a greater return for the inherent beta meaning.

A security plotted below the SML is overvalued because the investor would be accepting a lower return for the amount of risk assumed. The benchmark is often chosen to be beta meaning to beta meaning assets chosen by the investor. In practice beta meaning standard index is used. The choice of the index need not reflect the portfolio under question; e. The restriction to stocks as a benchmark is somewhat arbitrary. A model portfolio may be stocks plus bonds. Sometimes the market beta meaning defined as "all investable assets" see Roll's critique ; unfortunately, this includes lots of things for which returns may be hard to measure.

A stock whose returns vary more than the market's returns over time can have a beta whose absolute value is greater than 1.

A stock whose returns vary less than beta meaning market's returns has a beta with an absolute value less than 1. However, because beta also depends on the correlation of returns, there beta meaning be considerable variance about that average; the higher the correlation, the less variance; the lower the correlation, the higher the variance. Beta can also be negative, meaning the stock's returns tend to move in the opposite direction of the market's returns.

Higher-beta stocks tend to be more volatile and therefore riskier, but provide the potential for higher returns. Lower-beta stocks pose less risk but generally offer beta meaning returns. Some have challenged this idea, claiming that the data show little relation between beta and potential reward, or even that lower-beta stocks are both less risky and more profitable contradicting CAPM. Suppose an investor has all his money in an asset class X and wishes to move a small amount to an asset class Y.

For example, X could be U. Then the new portfolio, Z, can be expressed symbolically. This assumes that variance is an accurate measure of risk, which is usually good. However, the beta does need to be computed with respect to what the investor currently owns. Academic theory claims that higher-risk investments should have higher returns over the long-term. Wall Street has a saying that "higher return requires higher risk", not that a risky investment will automatically do better.

Some things may just be poor investments e. Further, highly rational investors should consider correlated beta meaning beta instead of simple volatility sigma. Theoretically, a beta meaning beta equity is possible; for example, an inverse ETF should have beta meaning beta to the relevant index. Also, a short position should have opposite beta.

This beta meaning return on equity, or equivalently, a firm's cost of equitycan be estimated using the capital asset pricing model CAPM. An indication of the systematic riskiness attaching to the returns on ordinary shares. It equates to the asset Beta for an ungeared firm, or is adjusted upwards to reflect the extra beta meaning of shares in a geared firm.

The arbitrage pricing theory APT has multiple betas in its model. Each beta meaning factor has a corresponding beta indicating the responsiveness of the asset being priced to that risk factor. Multiple-factor models contradict CAPM by claiming that some other factors can influence return, therefore one may find beta meaning stocks or funds with equal beta, but one may be a better investment. To estimate beta, one needs a list of returns for the asset and beta meaning for the index; these returns can be daily, weekly or any period.

Then one uses standard formulas from linear regression. The slope of the fitted line from the linear least-squares calculation is the estimated Beta. The y -intercept is the alpha. Myron Scholes beta meaning Joseph Williams provided a model for estimating betas from nonsynchronous data.

Beta specifically gives the volatility ratio multiplied by the correlation of the plotted data. To take an extreme example, something may have a beta of zero even though it is highly volatile, provided it is uncorrelated with the market.

The relative volatility ratio described above is actually known as Total Beta at least by appraisers who practice beta meaning valuation. Total beta meaning is equal to the identity: Total beta captures the security's risk as a stand-alone asset because the correlation coefficient, R, has been removed beta meaning betarather than part of a well-diversified portfolio.

Beta meaning appraisers frequently value closely held companies as stand-alone assets, total beta beta meaning gaining acceptance in the business valuation industry. Appraisers can now use total beta in the following equation: Some interpretations of beta are explained in the following table: It measures the part of the asset's statistical variance that cannot be removed by the diversification provided by the portfolio of many risky assets, because of the correlation of its returns with the returns of the other assets that are in the portfolio.

Beta can be estimated for individual companies using regression analysis against a stock market index. An alternative to standard beta is downside beta. Beta is always measured in respect to some benchmark. Therefore, an asset may have different betas depending on which benchmark is used. Just a number is useless if the benchmark is not known. Seth Klarman of the Baupost group wrote in Margin of Safety: Beta views risk solely from the perspective of market prices, failing to take into consideration specific business fundamentals or economic developments.

The price level is also ignored, as if IBM selling at 50 dollars per share would not be a lower-risk investment than the same IBM at dollars per share. Beta fails to allow for the influence that investors themselves can exert on the riskiness of their holdings through such beta meaning as proxy contestsshareholder resolutions, communications with management, or the ultimate purchase of sufficient stock to gain corporate control and with it direct access to underlying value.