Beta
Also called: CAPM, capital asset pricing model
A measure of how much a share's returns have moved with the overall market's, used in the capital asset pricing model.
A beta of 1 means a share has tended to move in line with the market; above 1, more; below 1, less. CAPM sets the cost of equity as the risk-free rate plus beta times the equity risk premium. Beta is unstable over time and ignores business risks such as debt or governance.
Learn more in these lessons
- Discount rates and the cost of equityHow do you choose a discount rate for valuing a company's shares?
- Beta and market riskWhat does a share's beta tell you about its risk?
- Hedging with derivativesHow can derivatives protect a portfolio, and what does that protection cost?
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