Series 65: Beta

Beta

When one is assessing the systematic risk of a portfolio, standard deviations are difficult to use because of the intercorrelations among securities within the portfolio. For this reason, many portfolio managers use beta coefficients, instead, to measure the systematic risk in a portfolio.

Beta coefficients are also used to assess the systematic risk of individual securities. We will begin our discussion of beta coefficients by examining their usefulness when evaluating individual securities and then move from there to a discussion of how they can be applied to portfolios.

Recall that beta coefficients are a measure of the volatility of a security relative to the overall market. While betas can be used to assess the performance of any type of asset, they are most commonly used to study the performance of stocks. If a stock has a beta of 1.0, it means that the stock moves up and down in lockstep with the market. Thus, if there is a 5% increase in the market, an investor can expect to