What does a stock beta of 2 mean?

Essentially, beta expresses the trade-off between minimizing risk and maximizing return. Say a company has a beta of 2. This means it is two times as volatile as the overall market. We expect the market overall to go up by 10%. That means this stock could rise by 20%.

What is the beta of a well diversified portfolio?

A beta of less than 1.0 indicates that only some of its returns are due to overall market movements. Adding an investment with a beta less than 1.0 to a well-diversified portfolio should reduce the portfolio’s risk. A beta of zero means that an investment’s returns are independent of market returns.

What is the alpha of a portfolio with a beta of 2 and actual return of 15 %?

A portfolio with a return of 15% and a beta of 2 lies on the SML and therefore has an alpha of zero.

What does a beta of 2.5 mean?

A positive beta, such as a one or two, means that the stock usually tracks the market in general. A zero beta means that the stock price is not correlated with the stock market at all. And a negative beta means that the stock tracks the market inversely.

What is a good portfolio beta?

A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock’s beta is less than 1.0. High-beta stocks are supposed to be riskier but provide higher return potential; low-beta stocks pose less risk but also lower returns.

What is the alpha of a portfolio with a beta of 2?

Beta indicates the volatility of a stock’s price relative to the market, as well as whether it moves in the same direction as the market as a whole. For example: An alpha of +2 means the return of an investment beats the return of the selected benchmark by 2 percent.

What is the beta for a portfolio with an expected return of 12.5 %?

What is the beta for a portfolio with an expected return of 12.5%? Since rf = 5% and E(rM) = 10%, from the CAPM we know that 12.5% = 5% + beta(10% – 5%), and therefore beta = 1.5.

Can you have a zero-beta portfolio?

A zero-beta portfolio is constructed to have zero systematic risk—a beta of zero. Zero-beta portfolios have no market exposure so are unlikely to attract investor interest in bull markets, since such portfolios would underperform diversified market portfolios.

How is the beta of a portfolio related to risk?

As I mentioned in the introduction, the risk of a portfolio depends upon the risk of the individual securities (which we’ve just learned). We can now discuss the impact on the portfolio as a whole. The beta of a portfolio is the weighted average of the individual asset betas where the weights are the portfolio weights.

When to increase volatility in your stock portfolio?

Traders often adjust the volatility of their portfolio as the overall market sends different signals. When it is going up, they increase the beta. When it is in correction mode, lower beta names help to preserve capital.

How does portfolio diversification help reduce risk and volatility?

Portfolio diversification is the risk management strategy of combining different securities to reduce the overall investment portfolio risk. It can help mitigate risk and volatility by spreading potential price swings in either direction out across different assets.

Where can I find the beta of my stock portfolio?

Beta for individual stocks is readily available on the websites of most online discount brokerages or reliable investment research publishers. To determine the beta of an entire portfolio of stocks, you can follow these four steps:

What should be the beta of a stock portfolio?

However, its non-systematic risk would be considerably higher than one would desire since there are only 3 components. All else being equal, the ideal would be to find a portfolio of perhaps 25-30 stocks that has a Beta portfolio of .83, as this would mitigate much of the non-systematic risk as well.

Which is more volatile the S & P or the beta?

A number higher than 1.0 indicates more volatility than the benchmark, while a lower number indicates more stability. For example, a stock with a beta of 1.2 is 20% more volatile than the market, which means if the S&P falls 10%, that stock is expected to fall 12%. 1 2

Why is it important to diversify your investment portfolio?

When you spread your investments across a broad number of companies, industries, sectors, and asset classes, you may be less heavily impacted by one market event. Diversification can also help reduce the volatility in your portfolios, allowing you to see steady growth without wild swings in the value of your savings.

When did diversification become a hot topic in investing?

The data in the chart below is from a 1987 study on diversification just after the market crashed. Obviously, at that time, diversification was a hot topic as investors scrambled to adjust portfolios and recoup the losses.