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Beta Coefficient – The Proper Understanding

Every investor wants to minimize the risk, in relation to the specified level of return. This risk is measured in the terms of beta co-efficient. Beta is the relative measure. i.e. beta of particular security or class of securities is measured in relation to the market beta. Market beta is always deemed to be 1(one).

CA. Tejas K. Andharia

Every investor wants to minimize the risk, in relation to the specified level of return.  This risk is measured in the terms of beta co-efficient.  Beta is the relative measure. i.e. beta of particular security or class of securities is measured in relation to the market beta.  Market beta is always deemed to be 1(one).  Thus, if beta of particular security is more than 1(one), it is more risky and consequently the investor would certainly want higher return and vice-versa.

Beta is actually a statistical phenomenon.  If one understands its roots in the statistics, it will never make a mistake in finding and applying the beta in practical terms. Consider the following example.

Year

Return on security “A” Market return

1

25%

21%

2

28%

23%

3

31%

28%

Now we will find out the beta by applying 4(four) different formulae with proper presentation which would help you to the great extent to understand the beta efficiently.

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