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In finance what does beta mean in investing


in finance what does beta mean in investing

What Is Beta in Stocks? Beta is a commonly cited risk measurement that gives insight into how volatile an investment has been compared to the. Beta is a measurement of how volatile a stock is relative to the overall stock market, usually as measured by the S&P index. A beta of two means the. Beta measures how much an investment will move compared to its benchmark. · A stock with higher beta may offer greater returns, but can also lead. TRADING STRATEGIES FOREX KILLER REVIEWS

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What is Stock Beta - Stock Market Beta - What is Investment Beta

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In finance what does beta mean in investing Some come from the consistency of growth, in earnings, or dividends. It means a higher potential reward for a given move in the market, yes. Does a higher beta mean more reward? The financial crisis in is an example of a systematic-risk event; no amount of diversification could have prevented investors from losing value in their stock portfolios. Generally, if you were investing in a mutual fund or other type of managed investment product, you would seek out managers with a higher alpha. Betas larger than 1.
Navitrader forex converter Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. Systematic risk is also known as un-diversifiable risk. Alpha vs. So, adding a down-trending stock with a low beta decreases risk in a portfolio only if the investor defines risk strictly in terms of volatility rather than as the potential for losses. It is obtained as the slope of the fitted line from the linear least-squares estimator. As a result, it's possible for a handful of highly valued stocks to represent a large percentage of the index's total value.
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Company X has been considered a defensive stock with a low beta. When it entered the merchant energy business and assumed more debt, X's historic beta no longer captured the substantial risks the company took on. At the same time, many technology stocks are relatively new to the market and thus have insufficient price history to establish a reliable beta. Another troubling factor is that past price movement is a poor predictor of the future.

Betas are merely rear-view mirrors, reflecting very little of what lies ahead. Furthermore, the beta measure on a single stock tends to flip around over time, which makes it unreliable. Granted, for traders looking to buy and sell stocks within short time periods, beta is a fairly good risk metric. However, for investors with long-term horizons, it's less useful.

Assessing Risk The well-worn definition of risk is the possibility of suffering a loss. Of course, when investors consider risk, they are thinking about the chance that the stock they buy will decrease in value. The trouble is that beta, as a proxy for risk, doesn't distinguish between upside and downside price movements.

For most investors, downside movements are a risk, while upside ones mean opportunity. Beta doesn't help investors tell the difference. For most investors, that doesn't make much sense. There is an interesting quote from Warren Buffett regarding the academic community and its attitude towards value investing : "Well, it may be all right in practice, but it will never work in theory. A value investor would argue that a company represents a lower-risk investment after it falls in value—investors can get the same stock at a lower price despite the rise in the stock's beta following its decline.

Beta says nothing about the price paid for the stock in relation to fundamental factors like changes in company leadership, new product discoveries, or future cash flows. A stock's beta will change over time because it compares the stock's return with the returns of the overall market.

Benjamin Graham, the "father of value investing," and his modern advocates tried to spot well-run companies with a "margin of safety"—that is, an ability to withstand unpleasant surprises. Some elements of safety come from the balance sheet , like having a low ratio of debt-to-total capital. On the other hand, we can go straight to the equation if you know some algebra or ever took a class covering regressions in college. Defining Beta Beta is a measure of volatility relative to a benchmark, and it's actually easier to talk about beta first.

Many growth stocks would have a beta over 1, probably much higher. A T-bill would have a beta close to zero because its prices hardly move relative to the market as a whole. Beta is a multiplicative factor. It goes up or down twice as much as the index in a given period of time. If beta is -2, then the investment moves in the opposite direction of the index by a factor of two. Most investments with negative betas are inverse ETFs or hold Treasury bonds.

What beta also tells you is when risk cannot be diversified away. If you look at the beta of a typical mutual fund , it's essentially telling you how much market risk you're taking. It's crucial to realize that high or low beta frequently leads to market outperformance. A fund with lots of growth stocks and high beta will usually beat the market during a good year for stocks.

If a stock or fund outperforms the market for a year, it is probably because of beta or random luck rather than alpha. Defining Alpha Alpha is the excess return on an investment after adjusting for market-related volatility and random fluctuations. Alpha is one of the five major risk management indicators for mutual funds, stocks, and bonds.

In a sense, it tells investors whether an asset has consistently performed better or worse than its beta predicts. Alpha is also a measure of risk. An alpha of means the investment was far too risky given the return. An alpha of zero suggests that an asset has earned a return commensurate with the risk. Alpha of greater than zero means an investment outperformed , after adjusting for volatility. When hedge fund managers talk about high alpha, they're usually saying that their managers are good enough to outperform the market.

But that raises another important question: when alpha is the "excess" return over an index, what index are you using? The manager might invest in small-cap value stocks. There is also a chance that a fund manager just got lucky instead of having true alpha.

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What is Beta? - MoneyWeek Investment Tutorials

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