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Glossary
Beta
Definition
A measure of the sensitivity of an asset (X) to a benchmark index (Y).
What is beta?
Beta is a measure of a stock's volatility in relation to the overall market. A beta greater than 1 indicates that the stock's price tends to be more volatile than the market, while a beta less than 1 means it's less volatile than the market. It's an essential component of the Capital Asset Pricing Model (CAPM), which is used to calculate the expected return of an asset based on its beta and expected market returns.
Why is beta important to consider when trading?
Beta is crucial for traders as it helps in assessing the risk and potential return of a stock relative to market movements. A high beta stock might offer higher returns but comes with greater risk, especially in a declining market. Conversely, a low beta stock might be less risky but offer lower returns. Understanding beta helps traders diversify their portfolios and align their investments with their risk tolerance and market outlook.