Beta

The Beta is a measure of the systematic risk of a security that cannot be

avoided through diversification.
Beta measures non-diversifiable risk. It is a relative measure of risk: the risk
of an individual stock relative to the market portfolio of all stocks.
Beta is a statistical measurement indicating the volatility of a stock’s price
relative to the price movement of the overall market.
Higher-beta stocks mean greater volatility and are therefore considered to
be riskier but are in turn supposed to provide a potential for higher returns;
low-beta stocks pose less risk but also lower returns.
 Beta

The market itself has a beta value of 1; in other words, its movement is
exactly equal to itself (a 1:1 ratio).
Stocks may have a beta value of less than, equal to, or greater than one. An
asset with a beta of 0 means that its price is not at all correlated with the
market; that asset is independent.
A positive beta means that the asset generally tracks the market.
A negative beta shows that the asset inversely follows the market; the asset
generally decreases in value if the market goes up.
 ?????
If Beta of a portfolio is 1.25 relative to Nifty50 index, how portfolio will
behave if Nifty50 index corrects by 10%?

a)No change in portfolio performance

b)Portfolio value will come down by 12.50%
c)Portfolio value will come down by 1.25%
The market itself has a beta value of 1; in other words, its movement is exactly
equal to itself (a 1:1 ratio). Stocks may have a beta value of less than, equal to,
or greater than one. An asset with a beta of 0 means that its price is not at all
correlated with the market; that asset is independent. A positive beta means that
the asset generally tracks the market. A negative beta shows that the asset
inversely follows the market; the asset generally decreases in value if the market
goes up .
 Problems with Beta
While it may seem to be a good measure of risk, there are some problems
with relying on beta scores alone for determining the risk of an investment.
Beta is not a sure thing. For example, the view that a stock with a beta of less
than 1 will do better than the market during down periods may not always be
true in reality. Beta scores merely suggest how a stock, based on its historical
price movements will behave relative to the market. Beta looks backward and
history is not always an accurate predictor of the future.
Beta also doesn’t account for changes that are in the works, such as new lines
of business or industry shifts. Indeed, a stock’s beta may change over time
though usually this happens gradually.
 Sharp ratio
The Sharpe ratio / Sharpe index / Sharpe measure / reward-to-variability ratio, is a
measure of the excess return (or risk premium) per unit of risk in an investment
asset or a trading strategy.
It is defined as - Sharpe Ratio comes very handy to measure the risk-adjusted
returns potential of a portfolio.
Generally, risk-adjusted return happens to be returns earned over and above the
returns generated by a risk-free asset like a fixed deposit or a government bond. 
The extra returns are viewed in the light of the “extra risk” which an investor
takes upon investing in a risky asset like equity funds.
 The risk inherent in an investment is determined using standard deviation. Thus,
a higher Sharpe ratio indicates better return yielding capacity of a fund for every
additional unit of risk taken by it.
It becomes a justification for the underlying volatility of the fund. In fact, you
may use Sharpe ratio to compare the funds.
 Sharp ratio

• The Sharpe Ratio is calculated by subtracting the risk-free return from

the portfolio return; which is known as the excess return.
• Afterward, the excess return is divided by the standard deviation of
the portfolio returns. 
• Basically, it is used to measure the excess return on every additional
unit of risk taken. Generally, it is calculated on a monthly basis and
then annualized for easy comprehension (for mutual fund portfolios)
 Sharp ratio - Calculation
• It is calculated using the formula given below:
 ?????
Suppose the financial asset has an expected rate of return of
9%. The risk-free rate is 3%. Calculate the Sharpe ratio when
the standard deviation of the asset’s excess return is 9%.

a)0.67
b)0.97
c)1.07
d)1.27