A stock’s BETA weight is a measure of its volatility in comparison with a market index that reflects the general trend of the stock exchange. The coefficient will show you how the expected return of a stock or portfolio is linked to the return of the financial market as a whole.
What does BETA coefficient stands for and what does it indicate?
In a recent Intercapital Invest report, Andreea Gheorghe (photo), manager of the analysis department illustrates the importance of the BETA weight.
According to portfolio theory, the risk of any security consists of two components: the non-systematic risk, unique to a specific security, also called diversifiable risk and defined through the volatility of the security (standard deviation) and systematic risk (also called market risk or non-diversifiable) explained by BETA index.
“This risk is diversifiable because it decreases and tends to 0 value, given the portfolio diversification (by including more securities in the portfolio)”, she explained.
At Bucharest Stock Exchange the market indices used to calculate BETA weight can be BET or BET-C.
“Conventionally, the value of BETA coefficient for the stock market as a whole (for a portfolio which includes all securities listed) is 1,” reads the report.
Therefore, a security with a BETA weight at 1 indicates that the security’s price will move with the market. A value higher than 1 indicates that the security will be more volatile than the market – go up or down more than the market, Andreea Gheorghe explained.
In case BETA coefficient goes below 1, the price of the security will have a narrow-band volatility compared to the market. Negative values show the security will move opposite to the market – when the market goes down, the respective security will go up, and reversely.
“For example a security with 1.2 BETA, its price is 20%
