Beta

Commonly used to refer to that part of a portfolio’s or fund’s return due to the market; i.e., independent of the manager’s effect. Thus an index fund ‘delivers beta’, while absolute return funds, if successful, are said to deliver ‘pure alpha’.

  • Beta risk
    A loose term for market risk (see beta).
  • Beta exposure
    That part of a portfolio’s or security’s movement deriving from the market (also known as ‘systematic risk’).
  • Beta-adjusted
    Refers to a return calculation on a portfolio or security that strips out the market return, leaving the idiosyncratic return (which may be positive or negative).
  • Beta returns
    A colloquial expression for market returns. The implication is that anyone can get market returns and that only a skilful manager can achieve excess returns, or alpha.
  • Beta providers
    Managers who manage funds designed merely to capture the returns of a particular market. Implies absence of skill. It would be extremely offensive, though not necessarily mistaken, to describe a hedge fund manager as a beta provider. See alpha provider.

Beta always lies between 0 and 1.

  • If β = 0, its price will change independently of changes in the market
  • If 0 < β < 1, its price will be less volatile than the market
  • If β = 1, its price will move in line with the market
  • If β > 1, its price will be more volatile than the market

Thus the higher the beta of a security or investment, the more exposed it is to fluctuations in the market, and the riskier it is considered.

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