Question

You and a group of your friends have been discussing your portfolios at the company water cooler. Your discussion has centered on how your stocks are moving up or down in price relative to the market as a whole. Each​ stock's ________ is likely the best measure of the relationship.

Answer 1

Answer:beta

Explanation:Beta is a measure of a stock's volatility in relation to the overall market.

Beta is a component of the capital asset pricing model (CAPM), which is used to calculate the cost of equity funding. The CAPM formula uses the total average market return and the beta value of the stock to determine the rate of return that shareholders might reasonably expect based on perceived investment risk. In this way, beta can impact a stock's expected rate of return and share valuation.

Beta is calculated using regression analysis. Numerically, it represents the tendency for a security's returns to respond to swings in the market. The formula for calculating beta is the covariance of the return of an asset with the return of the benchmark divided by the variance of the return of the benchmark over a certain period.