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The responsiveness of the price of a security with the market forces is called as beta of a security. The more responsive the price of a security to the changes in the market, the higher is its beta. The beta for the market is the average return for a large sample of stocks, such as Nifty 50 and S&P 500 Stock index. The beta for the overall market is equal to 1.The beta for individual securities is calculated by relating the returns on a security with that of the market. Betas can be less than 1 or more than 1. Normally the beta for a security is positive and lies between the values of 1 to 1.5.
Beta Coefficients of selected stocks
COMPANY BETA
Black & Decker 1.75
Disney 1.30
IBM 1.1
Merrill Lynch 1.5
Newmont Mining 0.5
Beta is useful to investors. Beta helps to measure the impact that market movements have on the expected return from a share of stock.
Let us consider an example.
a) Let us assume that the market is expected to provide a 7% rate of return for the next year. A stock having a beta of 2 would be expected to increase in return of 14% (7% * 2) during the same period.
b) If the market return is expected to be -7%, then a stock having a beta of 2% will experience a negative return of -14% (-7% * 2). The stock experiences decreasing returns and this is where risk prevails.
c) Stocks having Beta less than one will be less responsive to changing returns in a market and therefore are less risky. These stocks will not change too much in value due to market fluctuations.
Betas for a large number of stocks are provided by many large brokerage firms like Merrill Lynch. They are also provided for by services such as Value line. The parameters used in calculating beta include
R= The estimated return on the stock when the market value is zero
S= Measure of the stocks sensitivity to the market value and
M= The return on the market index.
Where:
The estimated return on the stock = R + (S*M)
The responsiveness of the price of a security with the market forces is called as beta of a security. The more responsive the price of a security to the changes in the market, the higher is its beta. The beta for the market is the average return for a large sample of stocks, such as Nifty 50 and S&P 500 Stock index. The beta for the overall market is equal to 1.The beta for individual securities is calculated by relating the returns on a security with that of the market. Betas can be less than 1 or more than 1. Normally the beta for a security is positive and lies between the values of 1 to 1.5.
Beta Coefficients of selected stocks
COMPANY BETA
Black & Decker 1.75
Disney 1.30
IBM 1.1
Merrill Lynch 1.5
Newmont Mining 0.5
Beta is useful to investors. Beta helps to measure the impact that market movements have on the expected return from a share of stock.
Let us consider an example.
a) Let us assume that the market is expected to provide a 7% rate of return for the next year. A stock having a beta of 2 would be expected to increase in return of 14% (7% * 2) during the same period.
b) If the market return is expected to be -7%, then a stock having a beta of 2% will experience a negative return of -14% (-7% * 2). The stock experiences decreasing returns and this is where risk prevails.
c) Stocks having Beta less than one will be less responsive to changing returns in a market and therefore are less risky. These stocks will not change too much in value due to market fluctuations.
Betas for a large number of stocks are provided by many large brokerage firms like Merrill Lynch. They are also provided for by services such as Value line. The parameters used in calculating beta include
R= The estimated return on the stock when the market value is zero
S= Measure of the stocks sensitivity to the market value and
M= The return on the market index.
Where:
The estimated return on the stock = R + (S*M)
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