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7.6: Beta

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    In addition to serving as a measure of market risk, Beta tells us how a particular stock moves in relation to the rest of the stock market as a whole.
    \[
    \beta_A=\frac{\left(\sigma_A\right)\left(\operatorname{corr}_{A, M K T}\right)}{\sigma_{M K T}}
    \notag \]

    where

    \(\beta_A\) represents the Beta of Stock \(A\)
    \(\sigma_A\) represents the standard deviation of stock \(A\)
    corr \(_{A, M K T}\) represents the correlation between stock \(A\) and the overall market \(\sigma_{\text {MKT }}\) represents the standard deviation of the overall market

    Consider the following example. Stock A has a standard deviation of \(60 \%\) while the overall stock market has a standard deviation of \(25 \%\). Assuming that the correlation between Stock A and the overall market is 0.30 , what is the beta of Stock A?
    \[
    \text { Beta }=[(60)(.30)] /(25)=18 / 25=.72
    \notag \]

    What is the Market?

    The market refers to a portfolio of all investment assets (stocks, bonds, gold , art, etc.). However, in more practical terms, the market usually refers to the stock market and can be measured by a market index (such as the S&P 500 or Dow Jones Industrial Average).

    7.6: Beta is shared under a not declared license and was authored, remixed, and/or curated by LibreTexts.

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