What is beta risk?
In investing, financial elasticity or beta risk is a ratio that shows the price volatility of shares or portfolio in relation to the market as a whole. The positive beta beta suggests that the asset fluctuates in accordance with the market, while the negative beta means that the price of the asset is moving in the opposite direction as the market. Beta ratios are indicators of relative risk associated with investing in the asset. Since the market that is usually represented by standards and the Index 500 (S&P 500®) is assigned a beta value of one, any beta asset risk greater than one has more volatility and greater risk. Such assets should bring more revenues than market yields to justify a greater risk.
For example, say that X has a beta risk of two. This means that the X is monitoring the market in overall growth or a decline in a factor of two. The four percent profits on the market should match six percent of the X Stock. If the market is expected to be represented by S&P 500®, returns seven percent, X stocks should earn at least 14 percent, which will double the return on the market. If the stock of X X does not bring 14 % return, then it is not a sound investment, because higher risks should be compensated by greater rewards.
shares with beta values do not follow the market trend. Examples of assets with beta zero are bonds of the United States Treasury and Deposit Certificates (CDS). Although these investments carry only a small risk of losing money, there is also an extremely low return on investment. These investment options are suitable for investors who have modest investment goals and an extremely low level of comfort with risk.
Beta Risk is calculated using complex mathematical formulas, namely regression analysis. Investors can be GEVOCTS BETA BETA with certain software programs using historical data for each companyNOST or can get values from different online services such as Reuters agencies. Unfortunately, different services can report different beta ratios for the same company. Beta calculations may include financial data from the last three years or five years, which represents differences in the reported values. However, a comparison of companies using the same service will provide a valid comparison of the risk.
In assessing the risk associated with certain investments, beta calculations have several disadvantages. They are dependent on the direction and size of price changes. The rapidly rising stock price on a slowly growing market will have a high beta beta, but slows down shares with the rise in stock prices, beta closer to the price of the market. Beta Risk is based on historical data that may have no effect on future risks. The main changes in the industry can also introduce an element with a risk that may not be precisely reflected in beta calculations. For these reasons, most investors use Beta for short -term investment decisions but long -term strategiesThey are best determined by studying other financial data.