Calculation of Beta Term Paper

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beta statistic is a coefficient of risk that investors use in order to determine whether or not an equity security is more or less risky than the market. This, in turn, is used to decide the ideal rate of return that the issue should maintain in order to warrant investment. If beta is one, then an issue is as risky as the market, and if it is zero, it is as risky as a risk-free rate that is usually represented in practiced by 30-year treasury bonds. The required rate of return on equity is always simply beta multiplied by the difference between the market's rate of return and the risk-free rate, added to the risk-free rate.

In modern portfolio theory, beta is often thought of as a measure of risk that cannot be eliminated through diversification.

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Beta statistics are determined for sectors and industries because portfolio managers often favor broader categories resulting from a 'top-down' approach to investment analysis. An alpha statistic is used to determine risk that may be eliminated through differentiation. For instance, the catastrophic effects of a flood are a particular danger, but one that may be eliminated through differentiation because floods are isolated incidents and do not affect the entire market at once (except in Bible stories.) However, if, for instance, interest rates shot up to 20% as they did in the early….....

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