Question

What risk factors are included in Beta?

Answer 1

The beta value is an indicator of systamatic risk which is used to value the stock of the company. This will show the volatility which is going to occur.Here the volatility of the stock is compared to the market volatility and comparing these particular changes which will helps to better valuation. Capital asset pricing model is the common model used for this purpose. Beta and beta risk are different. We can discuss about the risk factors in beta or what is the beta risk.

BETA RISK

There are some risk factors are included in beta calculation. When we are doing a project we will set a null hypothesis and according to the null hypothesis we arrive at a decision making. We can reject or accept the null hypothesis. So when we are discussing about beta risk we should understand about the null hypothesis. Beta risk is the probability that a wrong null hypothesis is accepted by doing such statistical tests. This is also called Type II error.Beta risk is highly associated with the sample size used for conducting the research. When the sample size is low then there is more chance of beta risk and if the sample size is very high then the beta risk will be less.Here the risk is the chance of making wrong decisions.

There are null hypothesis and alternative hypothesis. Sometimes we accept the null hypothesis instead of the alternative hypothesis even the alternative hypothesis is correct. Here we made a mistake in decision making. We put the wrong decision. This risk is known as beta risk. Likewise if the null hypothesis is true and we rejected the null hypothesis it is also beta risk. So making the wrong decision on the hypothesis will leads to beta risk. There are certain level of beta risk that the acceptable level of beta risk is considered as 10% and beyond that level the sample size should be incresed. Altman Z score is an hypothesis tesing method and it will predict the future bankcruptacy of the firm but these type of test contain a beta risk.

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