Question

What is beta? How much is the beta of the market?

Answer 1

There are two types of risks - Diversifiable (Non systematic risk) and Non-diversifiable (Systematic risk). Diversifiable risks are those which can be eliminated through diversification (ie; investing in more than one security also called portfolio management). However, non-diversifiable risks can not be eliminated but measured using Beta. Beta measures the sensitivity of stock with reference to the market as a whole.

For example beta of 1.5 indicates that the stock is 50% riskier than the market index. If the beta is 0.80, then it indicates that the stock is 20%(100-80) less risky than the index.

Usually an aggressive investor opt to invest in that stock which has a beta of greater than 1 (higher risk, rising market), whereas as a conservative investor opt to invest in that stock which has a beta of lower than 1 (lower risk, falling market).

Beta of market is 1