What is Beta?
Definition of Beta
Beta is the measure of the systematic risk or volatility of the security. It is used in the capital asset pricing model, which calculates the expected return of an asset depends on its beta and expected market returns.
Explanation of Beta
It is calculated by Regression Analysis, and it can be considered as the tendency of a security returns to respond to swings in the market.
The value of it as 1 indicates that the price of the security will move with the market. Its value less than 1 indicates that the price of the security is less volatile than the market.
It is greater than 1 indicates the high volatility of security price than the market.
Most of the high-tech, NASDAQ based stocks have the Beta-value greater than 1, which offers high rate of return subjected to the exposure to high risk.
The role of it is very important because it measures the investment risk, which cannot be avoided by diversification.