 Financial Terms Beta equation (Stocks)

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# Definition of Beta equation (Stocks) ## 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

# Related Terms:

## Accounting equation

The representation of the double-entry system of accounting such that assets are equal to liabilities plus capital.

## Accounting equation

The formula Assets = Liabilities + Equity.

## accounting equation

An equation that reflects the two-sided nature of a
business entity, assets on the one side and the sources of assets on the
other side (assets = liabilities + owners’ equity). The assets of a business
entity are subject to two types of claims that arise from its two basic
sources of capital—liabilities and owners’ equity. The accounting equation
is the foundation for double-entry bookkeeping, which uses a
scheme for recording changes in these basic types of accounts as either
debits or credits such that the total of accounts with debit balances
equals the total of accounts with credit balances. The accounting equation
also serves as the framework for the statement of financial condition,
or balance sheet, which is one of the three fundamental financial
statements reported by a business.

## Alpha equation

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

## 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

## 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.

## beta

Sensitivity of a stock’s return to the return on the market
portfolio. ## Beta coefficient

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

## 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 (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 risk

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

## Consigned stocks

Inventories owned by a company, but located on the premises
of its agents or distributors.

## 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.

## Departmental stocks

The informal and frequently unauthorized retention of excess inventory on the shop floor, which is used as buffer safety stock.

## Dividend yield (Stocks)

Indicated yield represents annual dividends divided by current stock price.

## Equation of Exchange

The quantity theory equation Mv = PQ. ## Expected return-beta relationship

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

## Floor stocks

Low-cost, high-usage inventory items stored near the shop floor,
which the production staff can use at will without a requisition and which are
expensed at the time of receipt, rather than being accounted for through a formal
inventory database.

## 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.

## 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.

## Listed stocks

stocks that are traded on an exchange.

## Listed stocks

stocks that are traded on an exchange.

## Margin account (Stocks)

A leverageable account in which stocks can be purchased for a combination of
cash and a loan. The loan in the margin account is collateralized by the stock and, if the value of the stock
drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. Margin
rules are federally regulated, but margin requirements and interest may vary among broker/dealers.

## Regression equation

An equation that describes the average relationship between a dependent variable and a
set of explanatory variables.

## 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.

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