Beta

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1. Investment evaluation.

In investment evaluation, beta is a measure of market risk and volatility.

Beta can refer to the market risk for a single financial asset or to an entire portfolio.


Beta is a measure of risk, not a risk in itself.

It measures how much performance responds - well or badly - when the rest of the market generally is doing well, or badly.

Utility providers - like water companies - are relatively stable and have low betas.

'Consumer discretionary' sectors are relatively unstable and have higher betas.


By definition, the beta of the whole market is one.

Therefore a beta of greater than 1 means that, on average, the asset is expected to increase in value by more than the market when the market is rising – and to reduce in value by more than the market when the market is falling.

An asset with a beta less than 1 is expected - on average - to increase and to reduce in value by less than the market.


Beta for a security can be calculated for historical periods using regression analysis.

The historical beta is the slope of the line of best fit comparing the historical returns on the individual security with those of the market as a whole.


2. Bank supervision - operational risk - TSA.

Under the Standardised Approach (TSA) for operational risk capital adequacy calculation, beta is the weighting applied to gross income, to calculate the measure of risk.


3. Bank supervision - capital adequacy - operational risk - BIA.

The term 'beta' is also sometimes used under the Basic Indicator Approach (BIA) calculation for operational risk capital requirements, where beta is the weighting applied to gross income, to calculate the measure of risk.

This weighting factor is also sometimes known as 'alpha'.


See also