Understanding Beta (ß)
Beta measures the sensitivity of stocks responsiveness to market factors. Generally, it is seen that when markets rise, most stock prices rise, when market down most of stocks price down. Beta measures how much a stock would rise or fall if the market rises / falls. The market is indicated by the index.
The index has a beta of one. A stock with a beta of 1.5 will rise / fall by 1.5% when the Nifty 50 rises / falls by 1%. Which means for every 1% movement in the Nifty, the stock will move by 1.5% (ß?= 1.5) in the same direction as the index. A stock with a beta of - 1.5% will rise / fall by 1.5% when the Nifty 50 falls / rises by 1%. Which means for every 1% movement in the Nifty, the stock will move by 1.5% (ß?= 1.5%) in the opposite direction as the index.
Similarly, Beta of a portfolio, measures the portfolios responsiveness to market movements. In practice given individual stock betas, calculating portfolio beta is simple. It is nothing but the weighted average of the stock betas. If the index moves up by 10%, the portfolio value will increase by 10%. Similarly if the index drops by 5%, the portfolio value will drop by 5%. A portfolio with a beta of 2, responds more sharply to index movements. If the index moves up by 10 percent, the value of a portfolio with a beta of two will move up by 20 percent. If the index drops by 10 percent, the value of a portfolio with a beta of two will fall by 20 percent. Similarly, if a portfolio has a beta of 0.75, a 10%movement in the index will cause a 7.5% movement in the value of the portfolio.
AS Chakravarthy NCFM Hyderabad : Stock Market Training Institute