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The Problem with Beta
By InvestingNook  •  April 14, 2015

Beta, through its place in the Capital Asset Pricing Model (CAPM) and the Discounted Cash Flow (DCF) model, forms the foundation of modern day security valuation. Today, we will talk about the problem with beta. As a business student, I find this to be something that is seldom covered in academic finance.

What is beta?

Beta is a measure of the risk arising from exposure to general market movements. Mathematically, it indicates the correlation of a security to a market benchmark. A security whose price exactly mirrors the market benchmark will have a beta of 1. Similarly, a beta below 1 indicates that the security is less volatile than the market and less correlated to the market.  Under the CAPM model, the expected return of a security return is directly proportional to the value of beta, as an investor should be better rewarded for taking on more risk.

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By InvestingNook
As Co-Founder and Fund Manager of Heritage Global Capital Fund, we started InvestingNook as a website dedicated to sharing the knowledge of value investing – allowing our readers achieve an edge over the markets with the knowledge of value investing.
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