From the course: Finance and Accounting Tips

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What is beta?

What is beta?

From the course: Finance and Accounting Tips

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What is beta?

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- Now, if you've hung around finance people at all, you've heard conversations involving the capital asset pricing model, or the CAPM, as they like to say. In this video, we'll discuss the CAPM and we'll focus primarily on one of its main components, beta. The CAPM is the expected return provided by an investment given its risk. The official formula for the CAPM is as follows. The expected return equals the risk-free rate of return plus beta times an equity risk premium. When you consider an investment opportunity, you, of course, expect a return. The risk-free rate is the minimum amount of return you would expect on an investment with zero risk. Now, of course there's no such thing as zero risk, but you can imagine a savings account at a local bank in the United States that is federally insured. Nowadays that rate hovers around 1%, think of that as the risk-free rate. But if you're investing in a company's stock, for example, there's more risk and as a result, you would expect a…

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