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Beta

Definition: [crh] The measure of an asset's risk in relation to the market (for example, the S&P500)Definition: or to an alternative benchmark or factors. Roughly speaking, a security with a beta of 1.5, will have move, on average<Definition: /A>, 1.5 times the market return. [More precisely, that stock's excess return (over and above a short-term money market rate) is expected to move 1.5 times the market excess return).] According to asset pricing theory, beta represents the typDefinition: e of risk, systematic risk, that cannot be diversified away. When using beta, there are a number of issues that you need to be aware Definition: of: (1) betas may change through time; (2) betas may be different depending on the direction of the market (i.e. betas may be greater for down moves in the market rather than up moves); (3) the estimDefinition: ated beta will be biased if the security does not frequently trade; (4) the beta is not necessarily a complete measure of risk (you may need multiple betas). Also, note that the beta is a measure of Definition: comovement, not volatility. It is possible for a security to have a zero beta and higher volatility than the market.

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