Beta coefficient originated from CAPM model, and its real meaning is the systematic risk measurement of a specific asset (or portfolio).

The so-called systemic risk refers to the fluctuation of asset prices affected by macroeconomics and market sentiment, in other words, the linkage between stocks and the broader market. The higher the proportion of system risk, the stronger the linkage.

The opposite of systematic risk is individual risk, that is, the price fluctuation caused by the company's own factors.

Total risk = system risk+personal risk

On the other hand, Beta reflects the sensitivity of the price of a specific asset to the overall economic fluctuation, that is, when the value of the market portfolio changes by 65,438+0 percentage points, the value of the asset changes by several percentage points-or, in more popular terms, when the market rises by 65,438+0 percentage points, the price of the stock changes by several percentage points.

Expressed as:

In practice, the historical rate of return of a single stock asset is generally used to return the rate of return of the index (market) in the same period, and the regression coefficient is beta coefficient.

General use of Beta

In general, the use of Beta is as follows:

1) Calculate the cost of capital and make investment decisions (only invest in projects with a return rate higher than the cost of capital);

2) Calculate the capital cost and formulate performance appraisal and incentive standards;

3) Calculate the cost of capital and evaluate assets (beta is the basis of discounted cash flow model);

4) Determine the systemic risk of a single asset or portfolio for portfolio investment management, especially the hedging (or speculation) of stock index futures or other financial derivatives.

The discussion about the fourth use of Beta will be the focus of this article.

Combination β

The beta coefficient has a very good linear property, that is, the beta of an asset portfolio is equal to the weighted sum of the beta coefficients of a single asset according to its weight in the portfolio.