BETA COEFFICIENT

This coefficient is used to compare the variability of the price (positive or negative) of a shares in relation to the market. A measure of the extent to which a particular security rises or falls in value in response to market movements.

It measures systematic risk which is the risk inherent in the whole financial system. beta coefficient is an important input in capital asset pricing model to calculate required rate of return on a stock. It is the slope of the security market line. Calculations: β = Covariance of market Return with stock Return / Variance of market Return β = Correlation Coefficient Between market and stock × (Standard Deviation of stock Returns / Standard Deviation of market Returns) This coefficient can have different values:
– Equal to 1: this means that the two returns (share and market) vary in the same way.
– Less than 1: the share value varies less than the market.
– Greater than 1: the share value varies more than the market