Why Calculating Beta of a Stock is Helpful

Many people think that calculation of beta of a stock is helpful only for portfolio manager, which is not the case. Knowledge of a beta of a stock can be helpful even for a small investor.

Beta is a term which is used with respect to stock market; it measures the risk which is non diversifiable or systematic risk of the stock in relation to the market. Beta can be calculated as co-variance between security returns and market return divided by variance of market return.

If beta of stock is more than 1 then it is considered as aggressive or risky security, if it is less than 1 then it is considered as defensive security and if it is 0 then it implies that its price is not at all correlated with the market.

As an investor if one is bullish about the market as a whole then he or she should buy the high beta stock because if market rise by 10 percent then high beta stock will rise more than 10 percent, while low beta stock will rise less than 10 percent. However if an investor feels that market will fall then he or she should buy a low beta stock because they will fall less as compared to high beta stock. In other words, in bull market those investors who invested in high beta stocks will get superior returns while in bear markets those investors who have invested in low beta stocks will be better off.

0 comments… add one

Leave a Comment


Related pages


accounts receivable securitizationdisadvantages to online bankingproprietary ratio investopediadiscounting a billentry for unearned revenuedisadvantages to democracybenefits of jit manufacturingplr sbidisadvantages of advertsexamples of diversifiable riskmonopoly tutor2uhypothecation mortgagebank overdraft advantages and disadvantagesdisadvantage of capitalismdefinition of current liabilities in accountingadvantages of planned economic systemmixed capitalist economybills receivable journal entrywhen is a trial balance preparedadvantages and disadvantages of welfare stateautocratic leadership stylesdefinition of bearer chequeglobalization in the caribbean advantages and disadvantageswhat is meant by consigneehorizontal analysis of a balance sheetdiversifiable riskadvantages of specialisation economicsnormal goods and inferior goodswhat is market skimming pricing strategydefinition of chequeswhat are the advantages and disadvantages of decentralizationsocialist economy characteristicsexamples of cost push inflationconsignee accountingimplication of capmdu pont identityprofitability ratio formulamarginal costing in management accountingdisadvantage of capitalismtypes of financial guaranteesthe advantages of federalismdeferred revenue journal entriesfii fdithe disadvantages of globalizationdiscounting bill of exchangedisadvantages of a centrally planned economybank loan advantages and disadvantageswholesale banking definitionvertical analysis and horizontal analysisfictitious assetprivatelizationstatutory liquidity ratio in hindiwhat is a withdrawal slipconsignor meaningwhat is meant by fictitious assetsmixed economy advantages disadvantagesmerits of advertisementwhat is a autocratic leaderadvantages of the payback methodimplicit cost vs explicit costfull form of repo ratedefine foreign exchange reservesdifference between draft and chequethe accounting for cash discounts and trade discounts areexamples of physical assetscapm assumptionsterm deposit examplepricing strategies skimmingmixed capitalist economypaid salaries to employees journal entrylifo system