The capital asset pricing model (part 1) – ACCA (AFM) lectures
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Sir, I’m a bit confused about how to interpret the Beta values.
As you mentioned, a Beta of 1 serves as a baseline. A security with a Beta of 1 indicates that it carries the same risk as the overall market. Consequently, the security will move up or down to the same extent as the market.
However, I’m puzzled about Beta values such as 0.80 and 1.50. Doesn’t a Beta of 0.80 mean that the security is 20% or 0.2 times less risky than the market as a whole? Yet, you seem to suggest that 0.80 means the security is 80% (please also tell that whether it would be 80% or .80%) or 0.80 times riskier than the market. How can a security be riskier than the market as a whole when its Beta is lower than the market baseline of 1?
The same confusion arises with a Beta of 1.50. Doesn’t it mean that the security is 50% or 0.50 times more risky than the market? However, you’re stating that it’s 150% riskier than the market. Shouldn’t only the incremental portion above the baseline indicate the increased risk?
Certainly! Here’s the revised message:
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Sir, I’m a bit confused about how to interpret the Beta values.
As you mentioned, a Beta of 1 serves as a baseline. A security with a Beta of 1 indicates that it carries the same risk as the overall market. Consequently, the security will move up or down to the same extent as the market.
However, I’m puzzled about Beta values such as 0.80 and 1.50. Doesn’t a Beta of 0.80 mean that the security is 20% or 0.2 times less risky than the market as a whole? Yet, you seem to suggest that 0.80 means the security is 80% (please also tell that whether it would be 80% or .80%) or 0.80 times riskier than the market. How can a security be riskier than the market as a whole when its Beta is lower than the market baseline of 1?
The same confusion arises with a Beta of 1.50. Doesn’t it mean that the security is 50% or 0.50 times more risky than the market? However, you’re stating that it’s 150% riskier than the market. Shouldn’t only the incremental portion above the baseline indicate the increased risk?
Sir I think I have made a mistake while interpreting.
I think while you were reading the Beta of .80, you were trying that the security is 80% or .8 as riskier as a market, and in case of 1.50 you mean that the security is 1.5 times or 150% as riskier as a market. Which indirectly also means that it’s 20% less riskier than the market and 50% more riskier than the market.
Hope you will endorse this response.
Yes – what you have written in this post is correct 馃檪