In finance, the beta (β) indicates whether an investment is more – or less – volatile than the market as a whole. In other words, beta is a measure of the risk arising from exposure to general market movements, and this is also known as the systematic risk.
Beta is used to assess and compare the amount of risk an investment adds to an already diversified portfolio. This means it is an important metric for measuring the risk exposure across investment strategies when that risk cannot be reduced through diversification.
A portfolio of all investable assets within the market has a beta of exactly one. A beta of less than one is indicative of either an investment with lower volatility than the market e.g. a government bond or else an investment with high volatility, whose price movements are not highly correlated with the market e.g. gold. A negative beta describes an investment that tends to increase in price when the general market price falls and vice versa. Securities Lending is an example of an investment strategy which has a negative beta. This is because, as the returns available from the market fall, lending rates will generally rise.
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