Question

What factors determine the beta of a stock? Which factor do you feel has the most significant impact on beta and why? 200 word minimum

Answer 1

The beta is a measure of systematic risk of a security. The risk of a security is generally measured by systematic risk and non-systematic risk. The beta is known as systematic risk and systematic risk is non-diversifiable, that means the risk which is common across all the security. The beta of a stock can differs and it is determined by as to how volatile is its return comparative to the market return. The beta of a market is 1 so if the beta of a stock is greater than 1, that means stock is riskier and if the beta is less than 1 that means the stock is less risky comparative to market returns. The beta of a stock can be affected by many factors such as business cycle, boom, recession or bust, the amount of financial leverage the company is having or its operating leverage. The factors like business cycle and operating leverage are more or less similar for a company within the same industry but the factor which is quite significant in the calculation of beta is its capital structure. Higher the debt in the capital structure, higher will be the levered beta of the stock, lower the debt as a component of total capital lower will be the beta of the stock.