A beta coefficient is a technique used in finance to assess how volatile an asset is compared to the market as a full or a specific portfolio. In other words, beta can be used to evaluate an investment’s risk compared to a benchmark, which can be either an individual portfolio or a broad market index.
For instance, based on an asset’s volatility relative to the market, beta can be used to estimate the expected return on investment. Therefore, beta is not used to determine the risk of single-asset investment. The investment’s risk to an existing portfolio is measured instead.
It can be understood by determining if the beta is above or below 1. This is true because if all investable assets were compared, the beta would be equal to 1. However, the beta would likely be higher or lower than one if we reached a particular asset to the market.
If the asset’s beta value is greater than 1, it is volatile, and its price movements follow the market. However, if the beta is smaller than 1, it may mean that an asset has reduced volatility or that its price changes are less correlated with the market.
