Beta: Difference between revisions

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Defined in a famous paper by William Sharpe in 1964 — he of the [[Sharpe ratio]] — [[beta]] is defined as  
Defined in a famous paper by William Sharpe in 1964 — he of the [[Sharpe ratio]] — [[beta]] is defined as  


“a portfolio risk that cannot be diversified away by adding more securities to it.”  
{{box|“a portfolio risk that cannot be diversified away by adding more securities to it.” }}


Since the whole market has all the securities in it, you can’t add to that, the whole market has a beta of 1. Therefore to track [[beta]] is to track the whole market’s performance.
Since the whole market has all the securities in it, you can’t add to that, the whole market has a beta of 1. Therefore to track [[beta]] is to track the whole market’s performance.

Revision as of 11:52, 18 November 2016

So-so. Ordinary. Unspectacular. Safe. Dull. Meets expectations. Won’t try to rip you off.

Defined in a famous paper by William Sharpe in 1964 — he of the Sharpe ratiobeta is defined as

“a portfolio risk that cannot be diversified away by adding more securities to it.”

Since the whole market has all the securities in it, you can’t add to that, the whole market has a beta of 1. Therefore to track beta is to track the whole market’s performance.

Therefore watch out for — well, to put not to fine a point on it — bullshit products claiming to yield returns like “intelligent beta”; “smart beta” or “enhanced beta”. Nonsense on stilts.

Good article here.

See also