Measures of Risk



Beta is another measure of volatility and is closely related to alpha. It is used to compare the risk of a particular security or portfolio with the market as a whole. Beta plays a critical role in the CAPM.


The market as a whole has a beta that is equal to 1. Securities or portfolios can have a beta that is higher than 1, less than 1, or equal to 1. If an investment has a beta of 1, it means that it follows the market.


If a security or portfolio has a beta of above 1, this means that it is more volatile than the market. So, if a stock has a beta of 1.5, then it means that it is 50% more volatile than the market as a whole.


Equally, if a security has a beta that is less than 1, it makes it less volatile than the market. For instance, a beta of 0.5% would make a stock 50% less volatile than the market.

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