Beta

Beta ($\beta$) measures an asset’s systematic risk, how much its returns move relative to the overall market.

Interpreted as:

• $\beta =1$: Asset moves in line with the market.
• $\beta >1$: Asset is more volatile than the market (higher risk and potential return).
• $\beta <1$: Asset is less volatile than the market (lower risk and potential return).

Calculated as the covariance of the asset’s returns with the market’s returns, divided by the variance of market returns:

$${\beta }_i=\frac{\text{Cov}(R_i,R_m)}{\text{Var}(R_m)}$$

Estimated using historical regression of asset returns against market returns. Or rather, the slope of line of best fit when plotting market returns to asset returns.

Used in CAPM to scale the Market Risk Premium to the asset’s level of risk.