Beta is a measure of systematic risk that is market risk. A Stock with lower beta means lower market risk and a stock with higher beta means high market risk. Systematic risk, also known as "market risk" or "un-diversifiable risk", is the uncertainty inherent to the entire market or entire market segment. Also, referred to as volatility, systematic risk consists of the day-to-day fluctuations in a stock's price
When beta of the company is changed that is level of risk change then the cost of capital of company is also change.
Beta is use to determine required rate of return of stock or portfolio by CAPM model. Formula for CAPM model is mention below:
Required rate of return = Risk free rate + (Market Return - Risk free rate) × Beta
Limitation of beta:
1. Beta for private firms cannot be determines exactly.
2. The stock which is not trading frequently, it is hard to determine its beta.
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