Question

In: Finance

If I have two portfolios and each of them has a beta of 2, can I...

If I have two portfolios and each of them has a beta of 2, can I conclude that they have the same risk?

Solutions

Expert Solution

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. In other words, beta gives a sense of a stock's market risk compared to the greater market. Beta is also used to compare a stock's market risk to that of other stocks.

Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.
So, i would like to conclude that the portfolio's with same beta value have same risk involve in it. some times beta values may go wrong because volatility of stocks depends on many factors like news based, trend etc which are actully not considered by beta.


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