what is beta in stock market?how it is calculated?do beta and regression are one and the same? explain me wi?

Question

explain as a lame person too can understand

Answer 1

Beta is the measurement of portfolio risk/return related to the market risk/return. A portfolio with a beta of 1.0 is going to have the same risk and return as the market. A portfolio with a beta above 1.0 has a higher risk and higher return than the market. A stock with a beta below 1.0 has a lower risk and lower return than the market.

If your portfolio has a beta of 1.5 and the stock market increases 1%, your portfolio will increase 1.5%. The inverse is also true.

During times when you expect the market to grow, you want stocks with high beta value (over 1.0.) During a recession, or slow-down, you want low beta (below 1.0.)

Answer 2

ok, I could give you the same finance babble as the others did, buuuut, I'm going to try to put it in simple english for you -

ok, a stock goes up, the market goes down, the difference (on average that the 2 diverge is the number beta

ok, a stock goes up and the market goes up, the amount that they go together is still the number beta

with me so far?

ok, in the first case the beta is less than it would be in the second case

you get it?

it's measures the average movement of a security's price in terms of the overall market that it is in (basically one stock against all of the other stocks in the market)

hope that helped b/c I don't think that I can make it much simpler

Answer 3

The idea of beta comes from Bill Sharpe's Capital Asset Pricing Model (CAPM). He won the Nobel Prize in Economics for it.

The model assumes that assets have two types of risk -- market risk and risk not related to the market. The idea is that we are not rewarded for risk that is not related to the market and that the expected return for a risky asset is:

E[Rx] = Rf + b * E[Rm-Rf]

where E[.] is the expected return of something (expected return meaning average return), Rx is the return of the risky asset, Rf is the return of the risk Free asset, b is the beta and Rm is the return on the market.

The right way to find the beta using historical data is to take each period's return for the risky asset and for the market and subtract the one period return for the risk free rate. This gives us the Excess Return on the asset and on the market.

Beta is equal to the covariance between the market's excess return and the asset's excess return divided by the variance of the market's excess return. This is identical to the coefficient that you get if you regress the asset's excess returns against the market's excess returns.

While this is the right way to do it, there are two common ways that people calculate beta that are not technically correct. One way is to regress the returns of the asset against the returns of the market, Bloomberg does this. It is easier to do than to regress excess returns.

The other common method is to regress the natural logarithm of gross returns. Value Line does this.

Bottom line -- beta is a measure of risk. A beta of 2 means that the asset is twice as risky as the market.

Answer 4

Good explanation Taranto. But bottom line is that Beta is not systematic risk it is an ATTEMPT to measure systematic risk.
What about APT? We must use many measures of risk, not just one like beta used in the CAPM. Besides using the CAPM to value stocks is not very accurate. Comparing predicted to actual results, they don't coincide as closely as we'd like.

Answer 5

hi this is the one whom u studied with... good question keep going