What is Beta?

A lot of the students are very confused with the term BETA in finance.

WHAT IS BETA?

Beta is defined as the volatility of the stock relative to the market.

If beta > 1 --> this implies that the stock is more risky than the market
If beta= 1 --> this implies that the stock is as risky as the market (that is why stocks with B=1 is also being referred to as market stock)
f beta < 1 --> this implies that the stock is less risky than the market

Beta is used to measure systematic risk 

There are three main methods to calculate beta:

1.  Plot market return against the company return and find the slope
2. Cov(stock, market)/ variance of market
3. CAPM formula --> E(R) = rf + (Rm-Rf)B

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