Definition of beta

Beta

Beta measures the volatility of a share compared to the average. It is used to increase or decrease the equity risk premium in the calculation of cost of equity. The idea is that for the average share, investors would expect 1 x the equity risk premium but for a more volatile share, they might expect say, 1.5 x the equity risk premium and for a less volatile share, half a risk premium might be enough. The term beta is also used to mean average stockmarket performance.

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