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Beta can be used to indicate the contribution of an individual asset to the market risk of a portfolio when it is added in small quantity. It refers to an asset's non-diversifiable risk, systematic risk, or market risk. Beta is not a measure of idiosyncratic risk. Beta is the hedge ratio of an investment with respect to the stock market.
Beta is an important measure of one type of risk, but it doesn’t encapsulate all of a stock’s risk. Stocks are shares of real-life businesses , which subjects them to the economic fortunes of ...
However, some firms are more sensitive to these factors than others, and this firm-specific variance is typically denoted by its beta (β), which measures its variance compared to the market for one or more economic factors. Covariance among securities result from differing responses to macroeconomic factors.
β, Beta, is the measure of asset sensitivity to a movement in the overall market; Beta is usually found via regression on historical data. Betas exceeding one signify more than average "riskiness" in the sense of the asset's contribution to overall portfolio risk; betas below one indicate a lower than average risk contribution.
A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk. [1] It is used widely in finance and economics, the general definition being the expected risky return less the risk-free return , as demonstrated by the formula below.
Roll's critique has received a large number of citations in the financial economics literature, with tens of citations per year as of 2017–2019. [3] The majority of these citations refer to the second statement of critique; few papers address the first statement.
The importance of Hamada's equation is that it separates the risk of the business, reflected here by the beta of an unlevered firm, β U, from that of its levered counterpart, β L, which contains the financial risk of leverage. Apart from the effect of the tax rate, which is generally taken as constant, the discrepancy between the two betas ...
One such measure is the Arrow–Pratt measure of absolute risk aversion (ARA), after the economists Kenneth Arrow and John W. Pratt, [5] [6] also known as the coefficient of absolute risk aversion, defined as