What is Beta? Explanation and a Few Remarks

Capital Asset Pricing Model
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Christian Laprise
Manager, Canada

What is Beta? Explanation and a Few Remarks

1. Beta is a risk indicator, not a rate of return indicator.
2. Beta with no risk is 0 (used to be treasury bond).
3. Beta of 1, means a firm has the same risk as the market.
4. Beta of 1 means the firm will have the same variation (standard deviation) level of the market but not the same correlation.
5. The correlation is the fact that a firm variation is at the same time of the market.
6. If the Beta is smaller than 1, this mean the firm will have smaller variation (in return) than the market.
7. We used to say that higher risk means a higher rate of return. This is a global assumption, but in special circumstances a firm can (temporarily) have a higher return and a smaller risk (smaller variation).

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