Finance Term Papers
What does "beta coefficient" mean?
A beta coefficient is a statistical measure showing to what extent an individual
stock or a portfolio has historically moved up or down in price relative to an
index such as the Standard and Poor's 500 stock index which, as the benchmark,
has a beta coefficient of 1. If a stock has a beta higher than 1, it is more
volatile than the index. Likewise, a stock with a beta of less than 1 can be
expected to rise or fall more slowly than the market because it is less volatile
and therefore a more conservative investment. A 0.7 beta indicates that the
investment has 30 percent less volatility than the overall market, and a 1.2
beta means that a security or portfolio is 20 percent more volatile. By using
the beta measure, advisors can tell their clients whether they should expect
wider or narrower price fluctuations than the broad market. “
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“n. (EN) Syn: beta . A measure of the variability of rate of return (or
rarely, price) of a stock or portfolio compared to that of the overall market.
The measure of systematic risk of a security. Beta (or beta coefficient) is a
means of measuring the volatility of a security or portfolio of securities in
comparison with the market as a whole. Beta is calculated using regression
analysis. A beta of 1 indicates that the security's price will move with the
market. A beta greater than 1 indicates that the security's price will be more
volatile than the market. A beta less than 1 means that it will be less volatile
than the market.
Many utilities stocks have a beta of less than 1. Conversely most high-tech
Nasdaq based stocks have a beta greater than one as they offer a the possibility
of a higher rate of return but are also more risky.
You can think of beta as the tendency of a security's returns to respond to
swings in the market. For example, if a stock's beta is 1.2 it's theoretically
20% more volatile than the market.” (http://glossaries.axon.ch/)
A beta is a statistical measure which shows the extent an individual stock or a
portfolio has moved up or down in a historical fashion, in price relative to an
index such as the standard and Poor’s 500 stock index, which as the benchmark,
has a beta coefficient of 1. Any stock with a beta less that 1 can be expected
to rise or fall more slowly than the market, as it is less volatile and
therefore a more conservative investment. An investment has 30 percent less
volatility than the overall market, provided the beta is 0.7. On the other hand
1.2 beta means that a security or portfolio is 20 % more volatile. The advisors
can tell their clients if they can expect wider or narrower price fluctuations
than the broad market.
Beta coefficient is a means of measuring the volatility of a security or
portfolio of securities in comparison with the market as a whole. The security
price will move with the market if the beta is 1. The security’s price will be
more volatile than the market if the beta is greater than 1.The security’s price
will be less volatile if the beta is less than one.
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Volatility=total risk=systematic risk + idiosyncratic ()
According to this formula, beta only deals with systematic risk. A company or
group with a beta less than one would have the systematic component of risk less
volatile than the market. The idiosyncratic risk component plays a vital role in
this regard. If the later component is large, it can offset the first and thus
will make a no9w beta stock or portfolio more volatile than the market. The
beta-volatility reprisal is more likely to seize for a portfolio as
idiosyncratic risk is potentially diversified away. in addition, for an typical
stock, the regular component is less than 25% of total risk as measured by the
conflict of asset returns.
We may make the argument more precise as the equation (*) can be written as
follows.
Volatility = variance=(beta) square x (variance of market)+idiosyncratic risk
Let us suppose that a stock is with beta, a smaller amount than zero, say beta=
-2.
Substituting this in the above equation has to give way a variance greater than
the market that is:
(- 2) square x (variance of market)>(variance of market). We should remember
that at the time of estimation of betas, the S&P is used as a proxy for the
market.
So beta coefficient is a measure of the unpredictability of a share. A share
with a high beta coefficient is likely to react to stock market moves or falling
in value by more than the market average.
How financial markets work
The role of money
Money has a number or uses. We can keep our money in a bank and it is a safe
place for our savings. Here our money will gain interest while we are not using
our money. In fact the money is not idle in the bank. This money is helping
others to buy homes, cars and go to universities. When the bank makes a loan,
the bank is drawing on all the money people have put into it. Thus bank acts as
a financial market place for money. A bank loan might help in fuelling growth,
but one day the loan have to b paid back and the interest is also to be attached
with that money. Interest is nothing but a fee to cover the cost of borrowing.
Money can be used by people to make investment. It is like a loan to the
company, when you invest in that company. You can buy bonds, buy a part of the
company or in other words you buy stock. The company uses your money in
different projects, like purchasing heavy equipment, increase the advertising
budget, hire new people, put more emphasis on research in new products and many
other departments. There are many different sizes and shapes of businesses. A
sole proprietorship is a business owned and operated by one person. It is easy
to form and the profits goes directly to the owner. The owner has to carry all
the responsibilities and risks in operating a business. The owner might have
shortage of money or capital. To cope with this problem he may join with other
owners or people to make a partnership. This kind of setup can be owned by two
or more persons. As a result of this act they have more capital to invest on
their business, but the decision making power will have to be shared and there
is a chance that the cash may still be lower than needed.
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There are several choices if a company wants to grow. The first option is to
utilize its profits for capital, which is called reinvestment. As a person can
borrow money from a bank, the same way a company can borrow from a bank. The
limit of the bank and the rate of interest and the period of the loan is decided
by the bank. For longer term growth, a company tries a different of borrowing.
The issue bonds. A bond is an IOU from the company to the investors. The bond is
matured from six months to thirty years. After the maturity of the bond the
amount must be returned to the people who invested. During the period each
investor gets the interest at specific intervals.
For raising capital there is a fourth option and that is to sell piece of
ownership in the corporation to the public. The evaluation of the company, the
determination of a price for the stock and serving as an intermediary, services
of an investment banker could be sought. IPO or initial public offering is the
name given to the stock when it is sold for the first time to the primary
market. When they want to resell the stock, a secondary market is the only place
to go. The company is transformed from a private business owned by a few people
to a public business collectively by a large pool of investors, through selling
stock.
The stock, bond or future contract are bought or sold in a financial market.
This is the place where firms and individuals enter into contract to sell or buy
a specific product as stock, bond or futures contracts. There is a tussle
between the buyers and sellers. The buyers want to buy at the lowest available
price and the sellers on the other hand seek to sell at the highest available
price. Through brokers and dealers bonds also can be transferred from one owner
to another. Stocks, bonds and futures contracts can also be sold in groups as
mutual funds
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