What is Beta Coefficient?
Beta is a measure of how much an asset’s return moves in response to changes in the overall market return. A beta of 1 means the asset moves in line with the market, above 1 means it is more volatile than the market, and below 1 means it is less volatile.
How It Works
- Run a regression of asset returns on market returns.
- The slope of that regression line is the beta.
- Use the beta in CAPM to estimate the required return on equity.
- Update beta periodically because business risk profile changes over time.
Saudi Context
Saudi banking stocks often show betas close to 1 against the TASI, while petrochemical stocks frequently exceed 1 due to commodity price sensitivity.
Example
If a stock has a beta of 1.5 and the market rises 10 percent, the stock is expected to rise about 15 percent; if the market falls 10 percent, it is expected to fall about 15 percent.