Beta

How much an asset moves when the market moves. One means with it, above one amplifies it, below one damps it — and it is the only risk the market pays you to hold.

Where you will meet it

Beta appears in 35 learning outcomes on the CFA syllabus. A few of them:

• Estimate the return equity holders require with both the market model and the CAPM
  CFA Level I · Equity Investments

  “The capital asset pricing model estimates the required return on equity as the risk-free rate plus beta times the equity risk premium: r = Rf + beta x (E(Rm) - Rf).”

• Derive a stock's alpha and beta by regressing its excess returns on those of the market
  CFA Level I · Quantitative Methods

  “The slope is beta, cov(stock, market) / var(market), which can also be written correlation x sd(stock) / sd(market); it measures systematic risk.”

• Work out a required return with the capital asset pricing model
  CFA Level I · Portfolio Management

  “The capital asset pricing model says the return required on an asset is the risk-free rate plus beta times the market risk premium.”

• Work out the cost of both common and preferred equity
  CFA Level I · Corporate Issuers

  “The capital asset pricing model estimates it as the risk-free rate plus beta times the equity risk premium.”

Learn it properly

• CAPM and the security market line: required return explained Guide
• Sharpe, Treynor and Jensen calculator Calculator

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with B · Glossary