What Is Beta?
Beta measures how sensitive an asset’s or portfolio’s returns are to returns on a specified benchmark, usually a broad market index. A beta of 1 indicates approximately one unit of benchmark-related movement for each unit of benchmark movement; a beta above 1 indicates greater sensitivity, and a negative beta indicates movement in the opposite direction on average. It does not mean the asset will match the benchmark on every day or that beta captures all of its risk.
For observations over the same dates and at the same frequency, beta is commonly estimated as the slope of a regression or as:
Beta = covariance(asset returns, benchmark returns) / variance(benchmark returns)
Beta changes with the benchmark, sample period, and return frequency. In portable alpha, an investor may hold or recreate the desired market beta while seeking an independent alpha source. This use of “beta” can also mean the market exposure itself, rather than its estimated sensitivity coefficient.
Further reading:
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