Sure, there are variations on beta depending on things such as the market index used and the time period measured. The beta calculation is used to help investors understand whether a stock moves in the same direction as the rest of the market. Of course, when investors consider risk, they are thinking about the chance that the stock they buy will decrease in value. Positive correlation is a relationship between two variables in which both variables move in tandem.
A beta of -1.0 means that the stock is inversely correlated to the market benchmark. Regression is a statistical measurement that attempts to determine the strength of the relationship between one dependent variable (usually denoted by Y) and a series of other changing variables (known as independent variables). Betas are merely rear-view mirrors, reflecting very little of what lies ahead.
It is used in the capital asset pricing model. A stock with a beta of 1.0 has systematic risk. Beta is a measure of the volatility, or systematic risk, of a security or portfolio in comparison to the market as a whole. Technology stocks and small cap stocks tend to have higher betas than the market benchmark. Investopedia requires writers to use primary sources to support their work.
Intuitively, it makes plenty of sense. It's a convenient measure that can be used to calculate the costs of equity used in a valuation method. The well-worn definition of risk is the possibility of suffering a loss. The security market line (SML) is a line drawn on a chart that serves as a graphical representation of the capital asset pricing model (CAPM). Alpha and beta are both risk ratios that calculate, compare, and predict returns. A key determinant of beta … High betas may mean price volatility over the near term, but they don't always rule out long-term opportunities. In order to make sure that a specific stock is being compared to the right benchmark, it should have a high R-squared value in relation to the benchmark. So, adding a down-trending stock with a low beta decreases risk in a portfolio only if the investor defines risk strictly in terms of volatility (rather than as the potential for losses). Understanding Unlevered Beta. R-squared is a statistical measure that represents the proportion of the variance for a dependent variable that's explained by an independent variable.
We also reference original research from other reputable publishers where appropriate. It's recommended that investors using beta to evaluate a stock also evaluate it from other perspectives—such as fundamental or technical factors—before assuming it will add or remove risk from a portfolio. This indicates that adding the stock to a portfolio will increase the portfolio’s risk, but may also increase its expected return. (B) Beta - Investopedia defines Beta as: "A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta says nothing about the price paid for the stock in relation to fundamental factors like changes in company leadership, new product discoveries, or future cash flows. Investopedia requires writers to use primary sources to support their work. It is used in the capital asset pricing model. These include white papers, government data, original reporting, and interviews with industry experts. While a stock that deviates very little from the market doesn’t add a lot of risk to a portfolio, it also doesn’t increase the potential for greater returns. International beta (often known as "global beta") is a measure of the systematic risk or volatility of a stock or portfolio in relation to a global market, rather than a domestic market. For beta to provide any useful insight, the market that is used as a benchmark should be related to the stock. Furthermore, the beta measure on a single stock tends to flip around over time, which makes it unreliable.