ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -In other words, it is the stock’s sensitivity to market risk. For instance, if a company’s beta is equal to 1.5 the security has 150% of the volatility of the market average. However, if the beta is equal to 1, the expected return on a security is equal to the average market return.

Detailed explanation-2: -Another way to calculate RRR is to use the capital asset pricing model (CAPM), which is typically used by investors for stocks that do not pay dividends. The CAPM model of calculating RRR uses the beta of an asset. Beta is the risk coefficient of the holding.

Detailed explanation-3: -Beta () is a measure of the volatility-or systematic risk-of a security or portfolio compared to the market as a whole (usually the S&P 500). Stocks with betas higher than 1.0 can be interpreted as more volatile than the S&P 500.

Detailed explanation-4: -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.

Detailed explanation-5: -The required rate of return (RRR) is the minimum amount of profit (return) an investor will seek or receive for assuming the risk of investing in a stock or another type of security. RRR is also used to calculate how profitable a project might be relative to the cost of funding that project.