Definition:
A beta coefficient is a measure of a stock’s volatility relative to the overall market. It indicates how much a stock’s price tends to move in relation to the market as a whole.
Key points about beta coefficient:
- Market volatility: A beta coefficient of 1.0 indicates that the stock’s price moves in line with the overall market.
- Above 1.0: A beta coefficient greater than 1.0 means the stock is more volatile than the market. It tends to move up or down more than the market.
- Below 1.0: A beta coefficient less than 1.0 means the stock is less volatile than the market. It tends to move up or down less than the market.
Why is beta coefficient important?
- Risk assessment: Beta coefficient is a key tool for assessing the risk of a stock. A higher beta coefficient indicates higher risk.
- Expected returns: Investors generally expect stocks with higher beta coefficients to have higher expected returns.
- Portfolio diversification: Beta coefficient can be used to diversify a portfolio by combining stocks with different beta coefficients.
In essence, beta coefficient is a measure of a stock’s volatility relative to the overall market, and it’s a key factor in assessing risk and expected returns.
