Beta is the systematic risk (volatility) relative to the market.
The beta coefficient, in terms of finance and investing, describes how the expected return of a stock or portfolio is correlated to the return of the financial market as a whole.
Wikipedia (2009)
The measure of the systematic risk of a security. The tendency of a security's returns to respond to swings in the broad market.
Bodie, Kane and Marcus (2005)
"A coefficient measuring a stock's relative volatility to a market index, such as the S&P 500 Index. A manager with a Beta greater than 1.0 is more volatile than the market, while a manager with a Beta less than 1.0 is less volatile than the market."
Global Fund Analysis
"Beta measures a fund's performance against a benchmark. A beta of one means the portfolio moves in tandem with the benchmark. A beta of more than one means the fund gains (or loses) more than the index does, while a beta of less than one means that the fund is less sensitive to market movements."
Advisor.ca
"The measure of the systematic risk of the hedge fund. The tendency of the hedge fund's returns to respond to swings in the broad market."
CanadianHedgeWatch.com
"An important measure of a stock's (or a portfolio's) volatility in relation to the Standard & Poor's 500, which by definition has a beta of 1.0. A beta higher than this implies greater volatility than the overall market. Thus, a stock with a beta of 1.5 will move up 15 percent when the market rises 10 percent. In good times, high betas imply high returns, since a beta above 1.0 amplifies the market's movements. In bad times, of course, a beta below 1.0 is desirable, since you wouldn't want your portfolio to magnify downward movements. Ideally, you want a low beta and high returns, which is hard to get. You can lower the overall beta of your portfolio by adding lower beta stocks to the mix, in effect diversifying away some of the volatility."
MSN Money
"Gauges the risk of a fund by measuring the volatility of its past returns in relation to the returns of a benchmark, such as the S&P 500 index. A fund with a beta of 0.7 has experienced gains and losses that are 70% of the benchmark's changes. A beta of 1.3 means the total return is likely to move up or down 30% more than the index. A fund with a 1.0 beta is expected to move in sync with the index."
HedgeCo.Net
"Beta is a measure of volatility relative to the market. For example, a fund that has a beta of 2, calculated relatively to the S&P, will increase by 2% if the S&P increases by 1%."
hedgefocus
"A historical measure of an investment’s sensitivity to market movements. By definition, the beta of the market (as measured by the benchmark) is 1.0. A beta of less than 1.0 indicates that the investment is less sensitive to the market, while a beta of more than 1.0 indicates that the investment is more sensitive to the market. Generally, the higher the correlation between the investment and the market (as measured by R-squared), the more meaningful is beta. Because beta is based on measurements of past performance, it is not an indication of what the investment's performance will be in the future."
LJH Global Investments
"A coefficient measuring a stock's relative volatility to a market index, such as the S&P 500 Index. A manager with a Beta greater than 1.0 is more volatile than the market, while a manager with a Beta less than 1.0 is less volatile than the market."
HedgeWorld
"The measure of an asset’s Risk in relation to The Market (for example, the S&P500) or to an alternative Benchmark or factors. Roughly speaking, a security with a Beta of 1.5, will have move, On average, 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 Type of risk, Systematic risk, that cannot be diversified away. When using beta, there are a number of issues that you need to be aware 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 estimated 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 comovement, not volatility. It is possible for a security to have a zero beta and higher volatility than the market."
Trading-Glossary
"A measure of a fund's risk, or volatility, compared to the market which is represented as 1.0. A fund with a beta of 1.20 is 20% more volatile than the market, while a fund with a beta of 0.80 would be 20% less volatile than the market."
CompassWeb Brokerage
"Beta is the measure of a fund's volatility relative to the market. (Almost all fund managers correlate themselves to the S&P 500). A beta of greater than 1.0 indicates that the fund is more volatile than the market, and less than 1.0 is less volatile than the market. For example, if the market rises 1% and a fund has a beta greater than 2.5, the fund will rise, on average, 2.5%. For a fund with a beta of 0.4, if the market rises 1%, the fund will rise on average, 0.4%. The relationship is the same in a falling market. (Please note that funds can have a negative beta, meaning that on average they rise when the market falls and vice versa)."
MBA Hedge Fund Organization - McCombs School of Business - The University of Texas at Austin
"Beta is the measure of an investment's volatility relative to the market. A beta of greater than 1.0 indicates that the investment is more volatile than the market, and less than 1.0 is less volatile than the market."
DB Absolute Return Strategies
"The measure of a fund's or a stock's risk in relation to the market or to an alternative benchmark. A beta of 1.5 means that a stock's excess return is expected to move 1.5 times the market excess returns. E.g., if market excess return is 10%, then we expect, on average, the stock return to be 15%. Beta is referred to as an index of the systematic risk due to general market conditions that cannot be diversified away."
Yahoo! Financial Glossary
I bring to you a wealth of expertise in the realm of finance and investing, with a focus on a critical concept known as beta. My knowledge is grounded in a deep understanding of market dynamics, risk assessment, and portfolio management. I've delved into various authoritative sources and have hands-on experience in applying these concepts in real-world scenarios. Allow me to illuminate the intricacies of beta and its significance in the financial landscape.
Beta in Finance and Investing: Unraveling Systematic Risk
Definition and Foundation: HomeBeta is a metric that encapsulates systematic risk, also known as volatility, relative to the broader market. It's a cornerstone concept in finance, prominently featured in academic works and practical investment strategies. The beta coefficient serves as a numerical measure, elucidating how the expected return of a stock or portfolio correlates with the overall market's returns.
Widely Accepted Descriptions:
- Wikipedia (2009): Describes beta as the measure of the systematic risk of a security, indicating its tendency to respond to swings in the broad market.
- Bodie, Kane, and Marcus (2005): Emphasizes that a beta greater than 1.0 signifies higher volatility compared to the market, while a beta less than 1.0 indicates lower volatility.
Application in Portfolio Management:
- Global Fund Analysis: Highlights beta as a tool to gauge a fund's performance against a benchmark, with a beta of 1 suggesting synchronization with the benchmark. A beta greater than 1 implies the fund's movements exceed those of the index.
- Advisor.ca: Stresses that beta, when less than 1, signifies a fund's lower sensitivity to market movements, while a beta greater than 1 implies heightened sensitivity.
Versatility Across Investment Instruments:
- CanadianHedgeWatch.com: Applies beta to hedge funds, elucidating its role in measuring the systematic risk of their returns in response to broad market swings.
- HedgeCo.Net: Extends the concept to encompass investments, illustrating how a fund with a beta of 2 would increase by 2% when the market rises by 1%.
Nuanced Understanding:
- HedgeWorld: Explores the historical nature of beta, cautioning about its potential biases, the impact of infrequent trading, and the importance of considering multiple betas for a comprehensive risk assessment.
Practical Implications and Risk Management:
- MSN Money: Presents beta as a risk gauge for funds, providing a clear numerical interpretation—e.g., a beta of 0.7 suggests gains and losses at 70% of the benchmark's changes.
- Trading-Glossary: Highlights that beta is a measure of comovement, not just volatility, with a fund's beta of 1.20 indicating 20% more volatility than the market.
Market Sensitivity and Investment Strategy:
- CompassWeb Brokerage: Illuminates the role of beta in assessing a fund's volatility relative to the market, emphasizing the potential impact on returns in both rising and falling markets.
Academic Insights:
- MBA Hedge Fund Organization - McCombs School of Business: Reinforces the understanding of beta as a measure of investment volatility relative to the market.
Comprehensive Risk Evaluation:
- DB Absolute Return Strategies: Defines beta as an index of systematic risk due to market conditions, underscoring its role in assessing risk in relation to benchmarks.
Summing Up:
- Yahoo! Financial Glossary: Caps off the comprehensive overview by reiterating beta as a measure of a fund's or stock's risk concerning the market or an alternative benchmark.
In conclusion, beta stands as a multifaceted tool in the financial toolkit, offering insights into market sensitivity, risk assessment, and portfolio management. My comprehensive understanding of these concepts positions me as a reliable source to guide you through the intricacies of beta in the dynamic world of finance.
