This preview shows page 1. Sign up to view the full content.
Unformatted text preview: easure of
Risk A measure of nondiversifiable risk
Indicates how the price of a security responds to market forces
Compares historical return of an investment to the market return (the S&P 500 Index)
The beta for the market is 1.00
Stocks may have positive or negative betas. Nearly all are positive.
Stocks with betas greater than 1.00 are more risky than the overall market.
Stocks with betas less than 1.00 are less risky than the overall market. Figure 5.5 Graphical Derivation of
Beta for Securities C and D*
Beta Monthly Holding-Period Returns of Barnes &
Noble and the S&P 500 Index, December 2002 to
November 2004 (The SCL for Barnes & Noble) Beta: A Popular Measure of
Table 5.4 Selected Betas and Associated Interpretations Interpreting Beta
Interpreting Higher stock betas should result in higher expected returns due to greater risk
If the market is expected to increase 10%, a stock with a beta of 1.50 is expected to increase 15%
If the market went down 8%, then a stock with a beta of 0.50 should only decrease by about 4%
Beta values for specific stocks can be obtained from Value Line reports or online websites such as yahoo.com Interpreting Beta
Interpreting Capital Asset Pricing Model
(CAPM) Model that links the notions of risk and return Helps investors define the required return on an investment As beta increases, the required return for a given investment increases Capital Asset
Pricing Model (CAPM) (cont’d)
View Full Document
This note was uploaded on 10/31/2012 for the course ECON 435 taught by Professor Staff during the Fall '08 term at Maryland.
- Fall '08