We cannot reduce market risks or systematic risks but we can have a measure of these risks with the help of beta. With the help of beta we can approximately tell how much a particular stock will move if we know how much the whole stock market is going to move.

1. BETAA Measure Of Market Risk
ATIF GHAYAS
FACULTY OF MANAGEMENT STUDIES AND RESEARCH,
ALIGARH MUSLIM UNIVERSITY, ALIGARH

2. Contents
•Introduction
•Types of risk
•Beta: Meaning
•Beta: Definition
•Calculation
•Interpretation
•Uses and facts
•Criticism
•Conclusion
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BETA: A MEASURE OF MARKET RISKATIF GHAYAS

3. Introduction
Asthedeterminationofthecorrectmeasureoftheriskhasimplicationsonvaluation,portfolioselectionandcapitalbudgeting,thisissuehasreceivedampleattentioninthefinancialliterature.CapitalAssetPricingModelofSharpe,LintnerandMossinisundoubtedlythemostpopularapproachtomodelrisk-returnrelationship.
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4. Types of Risks
InthecontextofCAPM,theriskofanassetcanbedecomposedintotwocomponents.
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UNSYSTEMATIC RISKS
SYSTEMATIC RISKS
Specific to individual asset and can be eliminated by means of diversification.
Related to overall market and diversification cannot eliminate it.

5. Beta: Meaning
•Wecannotreducemarketrisksorsystematicrisksbutwecanhaveameasureoftheseriskswiththehelpofbeta.
•Withthehelpofbetawecanapproximatelytellhowmuchaparticularstockwillmoveifweknowhowmuchthewholestockmarketisgoingtomove.
•Thus,betatellsuswhatthevolatilityisinaparticularstockwithrespecttomovementsinthestockmarket.
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6. Continued…
•Betaisalsoreferredtoasfinancialelasticity,andcanbereferredtoasameasureofthesensitivityoftheasset'sreturnstomarketreturns.
•Itdoesnotmeasuretheriskofaninvestmentheldonastand-alonebasis,buttheamountofrisktheinvestmentaddstoanalready-diversifiedportfolio.
•IntheCAPM,betariskistheonlykindofriskforwhichinvestorsshouldreceiveanexpectedreturnhigherthantherisk-freerateofinterest.
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7. Beta: Definition
“The Beta Coefficient in terms of finance and investing is a measure of the systematic risk of a stock or portfolio. It quantifies relative volatility in relation to the overall market, which is defined as having a beta of 1.”
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BETA: A MEASURE OF MARKET RISKATIF GHAYAS

8. Calculation
•Betaiscalculatedonhistoricalbasiswiththehelpofhistoricalreturnsonaparticularstockandhistoricalreturnsonthestockmarket.
•Thewholemethodconsistsoffindingcovariancebetweenthemarketreturnsandstockreturnsanddividingitbythevarianceofmarketreturns.
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9. Steps in Calculation
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Step 1
Step 2
Step 3
Download the historical prices for the stock and the benchmark index
Calculate the percentage returns for both the stock and the index.
Calculate Stock’s Beta using the following formula

10. •It is calculated with the help of the following formula:
•Where : Rimeasures the rate of return of the stockRmmeasures the rate of return of the portfolio 퐶표푣(Ri, Rm) is the covariance between the rates of return
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Continued…

11. How to Interpret Beta
•Themarketitselfhasanunderlyingbetaof1.0,andindividualstocksarerankedaccordingtohowmuchtheydeviatefromthemarket.
•Astockthatswingsmorethanthemarket(i.e.morevolatile)overtimehasabetawhoseabsolutevalueisabove1.0.
•Ifastockmoveslessthanthemarket,theabsolutevalueofthestock'sbetaislessthan1.0.
•Fore.g.whenthemarkethasanoveralldeclineof3%astockwithabetaof2willfall6%,andviceversa.
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12. BETA: A MEASURE OF MARKET RISKATIF GHAYAS
Value of Beta
Interpretation
Example
β < 0
Asset moves in the opposite direction as compared to the index
Aninverse exchange-traded fund
β = 0
Movement of the asset is uncorrelated with the movement of the benchmark
Fixed-yield assets
0<β<1
Movement of the asset is in the same direction , but less than the movement of the benchmark
Stable, "staple" stock such as a company that makes soap.
β = 1
Movement of the asset is in the same direction as, and about the same amount
A representative stock
β > 1
Movement of the asset in the same direction, but more than the movement of the benchmark
Stocks strongly influenced by day-to-day market news
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13. Beta –Uses and Facts
•Betaiscalculatedonhistoricalpricesthusitdoesnotprovidetheexactpictureforfutureandarebackwardlooking
•Betahasnoupperorlowerbound,andbetasaslargeas3or4willoccurwithhighlyvolatilestocks.
•Betacanbezero.Somezero-betaassetsarerisk-free,suchastreasurybonds.
•Anegativebetasimplymeansthatthestockisinverselycorrelatedwiththemarket.
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14. Beta -Criticisms
•Pastpricefluctuationscannotcompletelydescribetheriskinasecurityaspastfluctuationcannotgiveexactpictureoffuture.
•Doesn’ttellsusaboutthereturnintervaltobeusedforthepurposeofestimatingbeta.
•Doesn’ttellusaboutthetimeperiodtobemeasuredforcalculation.
•Betaviewsrisksolelyfromtheperspectiveofmarketprices,failingtotakeintoconsiderationspecificbusinessfundamentalsoreconomicdevelopments.
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15. Conclusion
•Betaisquantifiable,whichmakesiteasytousetoworkwithandtocommunicate.
•Ithelpsustoanalyzeinabroadrangehowmuchyourstockreturnscandeviate.
•Thepastsecuritypricevolatilitydoesnotreliablypredictfutureinvestmentperformanceandthereforebetaisnottheperfectmeasureofrisks.
•Itisanintegralpartofcapitalassetpricingtheorywhichisusedtocalculaterequiredreturnsonastock.
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BETA: A MEASURE OF MARKET RISKATIF GHAYAS
Thank you!