If we consider all investable assets in existence, we would be comparing the whole market against itself, meaning that the value of beta would be precisely 1. But when comparing a certain financial instrument against the market, we will most likely get a beta higher or lower than 1. A beta higher than 1 indicates that the asset is not only volatile but also highly correlated with the market. In contrast, low or negative values of beta may suggest that an investment has lower volatility than the market, or that its price movements aren’t highly correlated with the market.
However, the beta coefficient may be deployed differently depending on the context. For example, mutual funds may calculate the beta coefficient of a financial instrument to gather insights into the risks of adding it to their investment portfolio. So beta calculations can help them choose which assets to include in their holdings, according to their risk profile.
A financial instrument used to track the price value of a given asset or basket of assets
How quickly and how much the price of an asset changes. Calculated in terms of standard deviations in the a...