In finance, the beta (? Or beta coefficient ) of the investment indicates whether the investment is more or less stable than the overall market.
Beta is a measure of risk arising from exposure to general market movements compared with idiosyncratic factors. The market portfolio of all investable assets has exactly 1 beta. A beta below 1 can indicate an investment with a lower volatility of the market, or volatile investments whose price movements are not highly correlated with the market. The first example is the treasury bill: the price does not rise or fall much, so it has a low beta. The second example is gold. Gold prices do go up and down a lot, but not in the same direction or at the same time with the market.
A beta greater than 1 generally means that both assets are volatile and tend to move up and down with the market. Examples are shares in major technology companies. A negative beta is possible for investments that tend to go down when the market goes up, and vice versa. There are some fundamental investments with consistent and significant beta negatives, but some derivatives such as put options can have a large negative beta.
Beta is important because it measures investment risks that can not be reduced by diversification. It does not measure the risks of stand-alone investment, but the amount of investment risk adds to a diversified portfolio. In the Capital Asset Pricing Model (CAPM), beta risk is the only type of risk in which investors should receive expected returns higher than the risk-free rate.
The above definition covers only theoretical beta. This term is used in many respects related to finance. For example, the beta usually quoted in mutual fund analysis generally measures the risk of funds arising from exposure to the benchmark for the fund, rather than from the exposure of the entire market portfolio. So they measure the amount of risk that funds add to a diversified portfolio of the same type of funds, rather than to a diversified portfolio of all fund types.
Beta decay refers to the tendency of firms with high beta coefficients (? & Gt; 1) to decrease the beta coefficients to the market beta. This is an example of regression to the mean.
Video Beta (finance)
Statistical estimates
Perkiraan statistik beta dihitung dengan metode regresi. Untuk aset dan patokan yang diberikan, tujuannya adalah untuk menemukan rumus perkiraan
where r a is the return of the asset, alpha (?) is an active return, and r b .
Karena data praktis biasanya tersedia sebagai rangkaian waktu sampel diskrit, model statistiknya adalah
where is it? t is the term error (unexplained return). The best estimate (in the meanings of the least squared error) for? and? are they like that ?? t 2 as small as possible.
Ekspresi umum untuk beta adalah
where Cov and Var are covarians and variants.
Where? a, b is the correlation of two returns, and? a and? b is the volatility of each. If a refers to investment and b refers to the market, it is now clear that the interpretation of beta as "investment volatility relative to market volatility" is inconsistent with how the beta is calculated; this is because of the correlation in the above formula.
Beta can be calculated for a price in the past, where data is known, which is a historical beta. However, what most people are interested in is the future beta , which deals with upcoming risks. Estimating the future beta is a difficult issue. One guess is that the future beta is the same as the historical beta.
From this, we find that the beta can be described as "relative correlated volatility". It has three components:
- correlated
- relatively
- volatility
Beta is also referred to as financial elasticity or relative correlated volatility, and may be referred to as a measure of asset return sensitivity to market returns, und diversified risk, systematic risk, or market risk. At the level of individual assets, measuring the beta can provide clues to market volatility and liquidity. In fund management, measuring the beta is considered to separate the manager's skills from his willingness to take risks.
Portofolio minat dalam formulasi CAPM adalah portofolio pasar yang berisi semua aset berisiko, dan dengan demikian istilah r b dalam rumus diganti dengan r m , tingkat pengembalian pasar. Garis regresi kemudian disebut garis karakteristik keamanan ( SCL ).
disebut alpha aset dan disebut koefisien beta aset . Kedua koefisien memiliki peran penting dalam teori portofolio modern.
For example, in a year in which the broad market or benchmark index returns 25% above the risk-free level, say two managers earn 50% above the risk-free rate. Because this higher return is theoretically possible only by taking a leveraged position in the broad market to double the beta to exactly 2.0, we would expect a skilled portfolio manager to build a portfolio that outperforms with a beta of less than 2, so the excess return is not explained by beta positive. If one portfolio manager has an average beta of 3.0, and the other has a beta of only 1.5, then CAPM simply states that an extra return from the first manager is not enough to compensate us for the manager's risk, while the second manager has done more than expected given the risks. Whether an investor can expect a second manager to duplicate that performance in the coming period is of course a different question.
Security market line
The SML graph results from the formula of the capital asset price (CAPM) formula. The x -axis represents risk (beta), and y -axis represents expected return. The market risk premium is determined by the slope of SML.
Relationship between ? and re-needed is plotted on the security market line (SML) which shows the expected return as a function ?. Intercept is the nominal risk-free level of R f available for the market, whereas the slope is E ( R m f (for market returns R m ). The security market lines can be considered as representing a single factor model of asset prices, where beta is a display of market value changes. The SML equation, giving the expected value of the return of the asset , is thus:
This is a useful tool in determining whether an asset being considered for a portfolio offers a reasonable expected return to risk. Individual securities are plotted on the SML graph. If security risks versus expected returns are plotted above SML, it is undervalued because investors can expect greater returns for inherent risks. Security plotted under SML is overvalued as investors will receive a lower return for the amount of risk assumed.
Maps Beta (finance)
Benchmark choice
In the US, published beta usually uses stock market indices like S & amp; P 500 as a benchmark. S & amp; P 500 is a popular index of large US capitalized stocks. Other options can be international index such as MSCI EAFE. These benchmarks are often chosen to be similar to the assets selected by the investor. For example, for people who have an S & amp; P 500 and gold bars, the index will combine S & amp; P 500 and the price of gold. In practice standard index is used.
The choice of index need not reflect the portfolio in question; for example, beta for gold bars compared to S & amp; P 500 may be low or negative carrying information that gold does not track stock and can provide mechanisms to reduce risk. Restrictions on stocks as a benchmark are somewhat arbitrary. A model portfolio can be stock plus bonds. Sometimes the market is defined as "all assets that can be invested" (see Roll criticism); unfortunately, this includes many things that the return may be difficult to measure.
Invest
By definition, the market itself has beta 1, and individual stocks are ranked according to how much they deviate from the macro market (for simplicity purposes, S & amp; P 500 is sometimes used as a proxy for the market as a whole). A stock whose return varies more than market returns from time to time may have a beta whose absolute value is greater than 1.0 (ie, in fact, greater than 1.0 will depend on the correlation of stock returns and market returns). A stock whose return varies less than market returns has a beta with an absolute value of less than 1.0.
A stock with beta 2 has an average return, with an average of twice that of the whole market; when market returns fall or increase by 3%, stock returns will fall or rise (each) by 6% on average. (However, since beta also depends on the correlation of returns, there can be considerable variance about the average, the higher the correlation, the less the variation, the lower the correlation, the higher the variant.) Beta can also be negative, meaning stock returns tend to move opposite direction with market return. A stock with beta -3 will see its returns decrease 9% (average) when market returns rise 3%, and will see a 9% rise (on average) if the market returns fall by 3%.
The higher beta stocks tend to be more volatile and therefore more risky, but provide a higher potential return. Lower-beta stocks are less risky but generally offer lower returns. Some people challenge this idea, claiming that the data show little relationship between beta and potential reward, or even that lower beta stocks are less risky and more profitable (contrary to CAPM). In the same way, the stock beta shows its relation to market changes, it is also an indicator for the return on investment demanded (ROI). With a 2% risk-free rate, for example, if the market (with beta 1) has an expected 8% return, the stock with beta 1.5 should return 11% (= Ã, 2% Ã, 1,5 (8% Ã, - 2%)) in accordance with the financial CAPM model.
Adding a portfolio
Suppose an investor has all the money in the asset classes X and want to move a small amount to the asset class Y. For example, X may be the US stocks, while Y could be the stock of the different countries, or bonds. Then the new portfolio, Z, can be expressed symbolically
Varians dapat dihitung sebagai
yang dapat disederhanakan dengan mengabaikan istilah 2 :
Rumus pertama tepat, sedangkan yang kedua hanya berlaku untuk kecil? Menggunakan rumus untuk? Y relatif terhadap X,
kita bisa menghitung
It shows that the assets with? greater than 1 will increase the variance, while the asset with? less than 1 will decrease the variance, if added in the right amount. This assumes that the variance is an accurate measure of risk, which is usually good. However, the beta must be calculated with respect to what investors currently have.
Academic Theory
Academic theory claims that high-risk investments should have higher returns over long term . Wall Street says that "higher profits require higher risk", does not mean risky investments will automatically be better. Some things may just be a bad investment (for example, playing roulette). Furthermore, a very rational investor should consider correlated volatility (beta) rather than simple volatility (sigma). Theoretically, negative beta equity is possible; for example, an inverted ETF must have a negative beta to the relevant index. Also, short positions must have opposite betas.
It is expected that the return on equity, or the equivalent, of the firm's equity costs, can be estimated using a capital asset pricing model (CAPM). According to the model, the expected return on equity is a function of the firm's beta equity (? E ) which, in turn, is a function of both the risk of leverage and assets (? A ):
dimana:
- K E = biaya ekuitas perusahaan
- R F = tingkat bebas-risiko (tingkat pengembalian pada "investasi bebas risiko"; mis., Obligasi Pemerintah AS)
- R M = kembali pada portofolio pasar
karena:
and
- Corporate value ( V ) cash and risk-free securities = debt value ( D ) equity value ( E )
An indication of systematic riskiness inherent in the return on common stock. This is equivalent to a Beta asset for a company that is not highlighted, or adjusted upward to reflect the extra risk of shares in the company being directed., That is Beta Directed.
Some beta models
Arbitration price theory (APT) has some beta in its model. Unlike the CAPM which has only one risk factor, ie the market as a whole, APT has several risk factors. Each risk factor has a related beta that indicates the asset's responsiveness that is priced for that risk factor.
The multi-factor model contradicts CAPM by claiming that some other factor may affect returns, therefore one can find two shares (or funds) with the same beta, but one can be a better investment.
Estimates
To estimate the beta, a person needs a list of results for assets and returns for the index; This return can be done daily, every week, or every period. Then one uses the standard formula of the linear regression. The slope of the fitting line of the least squares-linear calculation is Beta approximation. The y -intercept is alpha.
Myron Scholes and Joseph Williams (1977) provide models for estimating the beta of nonsynchronous data.
Beta specifically provides the volatility ratio multiplied by the correlation of data plotted. To take an extreme example, something may have a zero though very volatile beta, provided it does not correlate with the market. Tofallis (2008) provides a discussion of this, along with real examples involving AT & amp; T Inc. The graph showing monthly returns from AT & T seems to be more volatile than the index, but the beta standard estimate for this is less than one.
The relative volatility ratio described above is actually known as Total Beta (at least by an appraiser doing business valuation). Total beta equals identity: beta/ R or stock deviation standard/market standard deviation (note: relative volatility). Total beta captures security risks as stand-alone assets (because the correlation coefficient, R, has been removed from beta), rather than part of a well-diversified portfolio. Because assessors often value companies that are held tightly as stand-alone assets, the total beta gets acceptance in the business valuation industry. Assessors can now use the total beta in the following equation: total cost of equity (TCOE) = beta risk free rate  · equity risk premium. Once the assessors have a number of TCOE benchmarks, they can compare/contrast the risk factors present in these publicly traded benchmarks and the risks in their closely held company to better defend/support their judgments.
Interpretation
Some beta interpretations are described in the following table:
It measures the part of the asset statistical variations that can not be removed by the diversification provided by the portfolio of many risky assets, because of the correlation of its returns with the return of other assets in the portfolio. Beta can be estimated for each company using regression analysis of stock market indices. The alternative to standard beta is the downside beta.
Beta is always measured with respect to several benchmarks. Therefore, assets may have different betas depending on which benchmark is used. Only numbers are useless if the benchmark is unknown.
Extreme and interesting case
- Beta has no upper or lower borders, and a 3 or 4 beta will occur with volatile stock.
- Beta can be zero. Some risk-free zero-beta assets, such as treasury bonds and cash. However, just because beta is zero does not means that it is risk free. A beta can be zero simply because the correlation between item return and market return is zero. An example would be a bet on horse races. The correlation with the market will be zero, but certainly not a risk-free business.
- On the other hand, if a stock has a fairly low correlation but is positive with the market, but high volatility, then the beta may still be high.
- A negative beta means the stock is inversely correlated with the market.
- A negative beta may occur even when the benchmark index and stocks are considered to have a positive return. It is possible that a lower positive return of the index coincides with a higher positive return of the stock, or vice versa. The slope of the regression line in such a case would be negative.
- Using beta as a relative risk measure has its own limitations. Most analyzes only consider the size of the beta. Beta is a statistical variable and should be considered with statistical significance (R square value of regression line). A higher R square value implies a higher correlation and a stronger relationship between asset return and benchmark index.
- If beta is the result of one-share regression of the market where beta is quoted, betas from various countries can not be compared.
- Utility shares usually appear as low beta examples. It has similarities with bonds, as they tend to pay consistent dividends, and their prospects are not heavily dependent on economic cycles. They are still stocks, so market prices will be affected by overall stock market trends, even if this does not make sense.
- Staple stock is considered less affected by the cycle and usually has a lower beta. Procter & amp; Gamble, which makes soap, is a classic example. The others are Philip Morris (tobacco) and Johnson & amp; Johnson (Health & Consumer Goods).
- The 'Tech' stock is generally equated with a higher beta. This was based on the dot-com bubble experience around 2000. Although technology went so well in the late 1990s, it also fell sharply in the early 2000s, much worse than the overall market downturn. Recently, this is not a good example.
- During the fall of the market in 2008, financial stocks were very bad, much worse than the overall market. Then in subsequent years they get the most results, though they do not make up for their losses.
- Foreign stocks can provide some diversification. World benchmarks like S & amp; P Global 100 has a slightly lower beta than comparable US benchmarks like S & amp; P 100. However, this effect is not as good as it used to be; the various markets are now quite correlated, especially the US and Western Europe.
- Derivatives and other non-linear assets. Beta depends on the linear model. The option out of money may have a clear non-linear outcome. Changes in the price of an option relative to an underlying asset price change (eg stock) are not constant. For example, if someone buys the put option on S & amp; P 500, beta will vary as the price of the underlying index (and indeed due to volatility, time to expire and other factors) change. (see option price, and Black-Scholes model).
Criticism
Seth Klarman of the Baupost group writes in the Margin of Safety: "I find it unreasonable that a single number reflecting the previous price fluctuations can be considered to be entirely describing the risks in security Beta's view is risky only from the perspective of market prices, failing to consider certain business fundamentals or economic developments.The price level is also ignored, as if IBM selling at a price of 50 dollars per share would not be a low-risk investment than the same IBM at 100 dollars per share Beta fails to allow the influence that investors themselves can provide on the riskiness of their ownership through attempts such as proxy contests, shareholder resolutions, communication with management, or the final purchase of sufficient stock to gain control of the company and hence direct access to the underlying value, Beta also assumes that the potential increases and risks decrease from each investment is basically the same, because only the function of the volume of investment lity compared with the market as a whole. It is also inconsistent with the world as we know it. The fact is that the volatility of past security prices can not reliably predict future investment performance (or even future volatility) and therefore a measure of bad risk. "
At the industry level, the beta tends to underestimate the bottom-side beta two-thirds of the time (yielding too high a value) and overestimates the upper third-hand beta of the time that causes the value too low.
Another weakness of the beta can be illustrated by a simple example by considering two hypothetical stocks, A and B. Returns on A, B and markets follow the following probability distributions:
This table shows that stock A fell half as much as the market when the market fell and doubled the market as the market rose. Shares B, on the other hand, dropped twice as much from the market as the market dropped and rose as much as half the market as the market rose. Most investors will label B shares as more risky. In fact, A stock has a better return in every possible case. However, according to the capital asset pricing model, shares A and B will have the same beta, which means theoretically, investors will need the same rate of return for both stocks. Of course it is desirable that this example may break the CAPM because CAPM relies on certain assumptions, one of the most central is the absence of arbitration, however, in this example, buying A shares and selling B shares is an example of arbitrage as A stock is worth more in each scenario. This is an illustration of how to use a standard beta to mislead investors. The dual-beta model, on the contrary, considers this issue and distinguishes the beta downside of the upside beta, or the downside risks of reverse risk, and thus allows investors to make informed investment decisions better.
See also
References
External links
- ETF & amp; Diversification: Correlation Studies
- Leverage and diversify securities of public companies
- Calculate Beta in Spreadsheets
- Free Beta Calculator for each pair of Asset-Index
- Calculate Sharpe Ratio in Excel
- Calculate Beta in Excel
Source of the article : Wikipedia
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