Definition: A beta coefficient measures how likely the price of a security or a stock will change to a movement in the market price. The Beta of a stock or security is also used to measure the systematic risks associated with that investment.
What Does Beta Coefficient Mean?
What is the definition of beta coefficient? In the Capital Asset Pricing Model, the beta coefficient is used to calculate the rate of return of a portfolio or stock.
The calculation of Beta is a form of regression analysis, as it typically represents the slope of the security’s characteristic line; a straight line which shows the relationship between the rate of return of a stock and the rate of return from the market. That is simply a representation of the likelihood of a change in the rate of return of a stock or security as a result of a change in the rate of market returns. This can be ascertained through dividing the covariance of market return with stock return by the variance of market return, as shown below;
β = Covariance of Market Return with Stock Return / Variance of Market Return
If the coefficient is 1, then the price of the stock or security moves with the market. If the coefficient is less that one, then the security’s returns are less likely to respond to movements in the market. If the β coefficient is greater than 1, then the security’s returns are more likely to respond to movements in the market; more volatile.
Example
For example, Apple Inc’s (AAPL) beta is 1.44, meaning its stocks are more volatile and is 44% more likely to respond to a movement in the market. The Coca Cola Company (KO) has a β coefficient of 0.74, meaning its stocks are less volatile and is 26% less likely to respond to a movement in the market.
It must be noted that most utilities stocks have a beta of less than 1. On the other hand, most trades in technology, like listings on Nasdaq, have a β coefficient of greater than 1, indicating a likelihood of higher returns with more associated risks.
Summary Definition
Define Beta Coefficient: Beta coefficient means a financial metric that calculates the relationship between a stock’s price and the volatility of the market.
