What is BETA???

What is a Beta in the security market you may wonder about this? If your answer is yes its my little effort to tell you what is a beta in the security market and its importance.

Beta is a financial ratio. So before going to tell its importance I will tell you the definition of Beta to you.

Definition:

Beat is a measure of a Stock Price voitality in relation to rest of the market. So in other word Beta is Stock Price move in relation to market as a whole.

Why Beta is calculated?

Beta can be used for the purpose of decision making in regard of short term investment where the price is important factor or if you are looking to buy or sell investment in a shorter period.

How Beta is calculated?

The number is calculated for you using regression analysis. SAP500 is used as the base for the calculation of Beta. Actually there are no standard and common bases for calculation of the beta.

Stock that have a Beta greater the 1 have greater price voitality then overall market and more risk involved in it.
Stock with beat of 1 fluctuates in price at the same rate as market. So stock with beat less than I have less price votlaity then the market and less risky.

Beta and Risk:

Higher the Beta implies higher risk. Rock is always associated with return. Higher the Beat means higher the reward for your risk taking ablity. So if you accept more risk you are rewarded with higher returns than the market. But on the other hand a stock with beat below 1 may a safer investment but return will be low.

Drawback of Beta:

Beta uses historical data. The history may not be always turn true.
Beta doesn’t accounts for changes that taken in the industry or new line of business.