Financial Terms Beta coefficient

# Definition of Beta coefficient

## Beta coefficient

A measurement of the extent to which the returns on a given stock move with stock market.

# Related Terms:

## Security market line

Line representing the relationship between expected return and market risk.
Security market plane A plane that shows the equilibrium between expected return and the beta coefficient
of more than one factor.
Security selection
See: security selection decision.

## Security Market Line

A graph illustrating the equilibrium relationship between the
expected rate of return on securities and their risk as measured by
the beta coefficient

## Market Risk

The part of security's risk that cannot be eliminated by diversification. It is measured by the beta coefficient.

## Beta (Mutual Funds)

The measure of a fund's or stocks risk in relation to the market. A beta of 0.7 means
the fund's total return is likely to move up or down 70% of the market change; 1.3 means total return is likely
to move up or down 30% more than the market. beta is referred to as an index of the systematic risk due to
general market conditions that cannot be diversified away.

## Beta equation (Mutual Funds)

The beta of a fund is determined as follows:
[(n) (sum of (xy)) ]-[ (sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[ (sum of x) (sum of x)]
where: n = # of observations (36 months)
x = rate of return for the S&P 500 Index
y = rate of return for the fund

## Beta equation (Stocks)

The beta of a stock is determined as follows:
[(n) (sum of (xy)) ]-[(sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[(sum of x) (sum of x)]
where: n = # of observations (24-60 months)
x = rate of return for the S&P 500 Index
y = rate of return for the stock

## Coefficient of determination

A measure of the goodness of fit of the relationship between the dependent and
independent variables in a regression analysis; for instance, the percentage of variation in the return of an
asset explained by the market portfolio return.

## Correlation coefficient

A standardized statistical measure of the dependence of two random variables,
defined as the covariance divided by the standard deviations of two variables.

## Country beta

Covariance of a national economy's rate of return and the rate of return the world economy
divided by the variance of the world economy.

## Expected return-beta relationship

Implication of the CAPM that security risk premiums will be
proportional to beta.

## Foreign market beta

A measure of foreign market risk that is derived from the capital asset pricing model.

## Fundamental beta

The product of a statistical model to predict the fundamental risk of a security using not
only price data but other market-related and financial data.

## Information Coefficient (IC)

The correlation between predicted and actual stock returns, sometimes used to
measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted
and actual returns, while an IC of 0.0 indicates no linear relationship.

## Leveraged beta

The beta of a leveraged required return; that is, the beta as adjusted for the degree of
leverage in the firm's capital structure.

## Unleveraged beta

The beta of an unleveraged required return (i.e. no debt) on an investment when the
investment is financed entirely by equity.

## Zero-beta portfolio

A portfolio constructed to represent the risk-free asset, that is, having a beta of zero.

## Beta

A measure of the riskiness of a specific security compared to the
riskiness of the market as a whole; measure of the systematic risk
of a security or a portfolio of securities

## Correlation Coefficient

A measure of the tendency of two variables to change values
together

## coefficient of correlation

a measure of dispersion that indicates the degree of relative association existing between two variables

## coefficient of determination

a measure of dispersion that
indicates the â€śgoodness of fitâ€ť of the actual observations
to the least squares regression line; indicates what proportion
of the total variation in y is explained by the regression model

## coefficient of variation

a measure of risk used when the standard deviations for multiple projects are approximately
the same but the expected values are significantly different

## input-output coefficient

a number (prefaced as a multiplier
to an unknown variable) that indicates the rate at which each
decision variable uses up (or depletes) the scarce resource

## Beta

The price volatility of a financial instrument relative to the price
volatility of a market or index as a whole. beta is most commonly used with
respect to equities. A high-beta instrument is riskier than a low-beta
instrument.

## Correlation coefficient

A statistic in which the covariance is scaled to a
value between minus one (perfect negative correlation) and plus one (perfect
positive correlation).

portfolio.

## Beta risk

Risk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio.