- Cyclicality of revenues.
- Operating leverage.
- Financial leverage.
What factors determine beta?
To recap, the Beta Coefficient is determined by several factors: the variability of the individual stock return, the variability of the market return, and the correlation between the return on the security and the return on the market .
What factors determine the beta of a stock?
A security’s beta is calculated by dividing the product of the covariance of the security’s returns and the market’s returns by the variance of the market’s returns over a specified period . The beta calculation is used to help investors understand whether a stock moves in the same direction as the rest of the market.
What affects beta of a stock?
A company’s debt level impacts its beta, which is a calculation investors use to measure the volatility of a security or portfolio. ... If a company decreases its debt to the point where its levered beta is less than 1, the company’s stock is less volatile than the market.
What is stock beta based on?
Beta is a measure of a stock’s systematic, or market, risk, and offers investors a good indication of an issue’s volatility relative to the overall stock market. The market beta is set at 1.00, and a stock’s beta is calculated by Value Line, based on past stock-price volatility .
What does a beta of 1.5 mean?
Roughly speaking, a security with a beta of 1.5, will have move, on average, 1.5 times the market return . ... [More precisely, that stock’s excess return (over and above a short-term money market rate) is expected to move 1.5 times the market excess return).]
How do you calculate expected return in beta?
Expected return = Risk Free Rate + [Beta x Market Return Premium ]
What is a good beta for a stock?
A stock that swings more than the market over time has a beta above 1.0 . If a stock moves less than the market, the stock’s beta is less than 1.0. High-beta stocks are supposed to be riskier but provide higher return potential; low-beta stocks pose less risk but also lower returns.
How is the beta of a stock calculated?
Beta could be calculated by first dividing the security’s standard deviation of returns by the benchmark’s standard deviation of returns . The resulting value is multiplied by the correlation of the security’s returns and the benchmark’s returns.
What does a beta of 1 mean?
A beta of 1 indicates that the security’s price tends to move with the market . A beta greater than 1 indicates that the security’s price tends to be more volatile than the market. A beta of less than 1 means it tends to be less volatile than the market.
What stock has the highest beta?
- Advanced Micro Devices, Inc. ...
- United Rentals, Inc. ...
- Freeport-McMoRan Inc (NYSE: FCX), 2.51 beta.
- Devon Energy Corp (NYSE: DVN), 2.38 beta.
- Marathon Oil Corporation (NYSE: MRO), 2.31 beta.
- SVB Financial Group (NASDAQ: SIVB), 2.19 beta.
- IPG Photonics Corporation (NASDAQ: IPGP), 2.17 beta.
Is a high beta good or bad?
A high beta means the stock price is more sensitive to news and information, and will move faster than a stock with low beta. In general, high beta means high risk , but also offers the possibility of high returns if the stock turns out to be a good investment.
What is the difference between an asset beta and an equity beta?
The asset beta (unlevered beta) is the beta of a company on the assumption that the company uses only equity financing. In contrast, the equity beta (levered beta, project beta) takes into account different levels of the company’s debt .
How do you interpret beta?
Interpreting Beta
A β of 1 indicates that the price of a security moves with the market . A β of less than 1 indicates that the security is less volatile than the market as a whole. Similarly, a β of more than 1 indicates that the security is more volatile than the market as a whole.
What is considered a high beta?
A high-beta stock, quite simply, is a stock that has been much more volatile than the index it’s being measured against. A stock with a beta above 2 — meaning that the stock will typically move twice as much as the market does — is generally considered a high-beta stock.
What is the beta of a risk-free asset?
A zero-beta portfolio is a portfolio constructed to have zero systematic risk, or in other words, a beta of zero. A zero-beta portfolio would have the same expected return as the risk-free rate.
