What is “Beta” of a stock?

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The risk associated with a given stock can be measured either by standard deviation or the co-efficient of variation. The parameter of co-efficient of variation includes the scale of expected return unlike the standard deviation and hence is more comprehensive as a measure of risk. The comparison of co-efficient of variation in returns of a given stock with the co-efficient of variation in returns of market portfolio during the same time. This comparison is called “Beta”. We examine the following example.

Our investment in Reliance Industries Limited (RIL) has the co-efficient of variation as 10% for a given period of 6 months. Let us say that during the same period the co-efficient of variation of BSE sensex is 15%. Then the Beta for RIL stock is = 10%/15%. This gives us a number of 0.667. Thus “Beta” is the relationship between the co-efficient of variation of selected stock to the co-efficient of variation of market portfolio. At times students are confused with this concept and mistakenly identify as the relationship between the returns of selected stock and market portfolio.

 

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