# 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:

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

The formula Assets = Liabilities + Equity.

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.

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

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

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.

Sensitivity of a stock’s return to the return on the market

portfolio.

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

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

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.

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

Inventories owned by a company, but located on the premises

of its agents or distributors.

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.

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

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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