Question

Define beta, elaborate on the determinants of beta and present the range of values

Answer 1

Beta shows the particular asset RISK in relation with the benchmark or a market etc. It measures the volatility of an asset , mainly a portfolio.

Determinants of beta ;

1. Nature of business - Cyclical or Non cyclical business
2. Operating Leverage - Use of Fixed Cost
3. Financial Leverage - Debt in the capital structure

• A beta of 1 denotes to neutral volatility.
• A higher than 1 Beta means that the underlying asset is more volatile that the benchmark or a market.
• When the Beta is less than 1 denotes that the underlying asset is less volatile than the market or a benchmark.