Q – Can you provide me with a definition of Beta? What does it specifically measure? – D.D.
A – The following excerpt from my new book Secrets of Successful Investing may help. This passage was written by my co-author, Prof. Eric Kirzner, a professor of finance at the University of Toronto.
“Beta estimates an asset’s or a portfolio’s return relative to the return on a market index. A security or portfolio that moves proportionately and in lock-step with the market is said to have a beta of 1.0. If, for example, the rate of return on a market index such as the TSE 300 Composite Index is 8 percent, then a portfolio with a beta of 1.0 is also expected to return 8 percent. High beta securities and portfolios (betas greater than 1.0) are normally more volatile than the market index and are expected to provide higher returns than the market when the market rises and lower returns than the market when it falls. These are called aggressive securities or portfolios. For example, a security with a beta of 1.5 would be expected to return 12 percent when the market index rises by 8 percent and fall by 12 percent when the market index falls by 8 percent. Low beta securities and portfolios (betas less than 1.0) are less volatile than the market and are expected to provide lower rates of returns than the market when the market rises and larger rates of return than the market when the market drops. These are called defensive securities.”
Hope this helps. – G.P.