Coefficient beta

Last updated: 16.03.2016

Coefficient beta (β) is a measure of systematic risk of the company and its shares compared to systematic risk present in the market. In other words, it measures the proportion of undiversifiable risk present within the company capital that is compared to the overall market (systematic) risk. Beta is used in CAPM model to calculate the expected rate of return (cost of equity) and can be derived by the slope of Security market line (SML).

 

Company capital comprises of equity and debt capital. As the debt beta is assumed to be zero (it is in fact very low, but not zero), coefficient β is related just to the cost of equity. Therefore, if:

  • β > 1 → the particular share is more risky (volatile) than shares in the market (38) (e.g.  company share price will rise more quickly than average share in the market segment)
  • β < 1 → the particular share is less risky (volatile) than shares in the market (38)


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