What is beta and Alfa ?



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In the lesson Beta and Alfa, mere definition of Beta is given and in the Test paper question about Beta calculation is asked? Can I have more information about Beta.

Thank you


1 Answer(s)


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Hi, Thanks for asking the same.
Beta is a measure of the volatility(fluctuation), or systematic risk, or market risk, of a security or a portfolio in comparison to market as a whole, i.e. Sensex or Nifty. A beta of 1 indicates that the security's price will move with the market. A beta of more than 1 will indicate that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoritically 20% more volatile than the market.
You can see beta figures in any of the mutual fund's factsheet of equity funds.
Have given below 3 formulae to calculate it:
Beta = Co-variance(SENSEX, Stock)/ Variance(SENSEX). Another formula to calculate beta is for a portfolio, a mix of various stocks:
Wi*Bi or W1*B1+W2*B2+W3*B3.....where Wi is the weightage of the stock in the portfolio.
Also, there is a relationship which is derived from CAPM, which is:
Rs = Rf + Bs (Rm - Rf), where: Rs = return on security; Rf = risk-free return; Bs = beta; Rm = market return. Given the different scenario and data, we need to calculate beta accordingly.
Do get back for more clarifications.