Series 3: 3.2.1.3. Beta Coefficient

3.2.1.3. Beta Coefficient

Beta is essentially a measure of correlation, or how two items fluctuate in relation to one another. In the case of index futures, we are looking at the correlation between a single portfolio of securities and the market as a whole.

Looking at the CAPM formula, suppose a security’s beta = 1.0. The expected return of that security will be identical to the expected return of the market. In other words, the security can be expected to fluctuate by the same percentage the market fluctuates. A beta greater than 1.0 indicates that the price of the security moves more than the market. A beta less than 1.0 indicates that the price of the security moves less than the market. For example, a beta of 2.0 would indicate that a stock will be twice as volatile as the market. If the beta is 0.5, it will only move half as much as the broad market.

Note: It is important to recognize two unique situat