What is Beta (Investopedia):
A beta coefficient is a measure of the volatility, or systematic risk, of an individual
stock in comparison to the unsystematic risk of the entire market. In statistical terms, beta represents the slope of the line through a regression of data points from an individual stock's returns against those of the market.
What Beta Describes:
Beta describes the activity of a security's returns responding to swings in the market. A security's beta is calculated by dividing the product of the covariance of the security's returns and the market's returns by the variance of the market's returns over a specified period.
The beta calculation is used to help investors understand whether a stock moves in the same direction as the rest of the market, and how volatile or risky it is compared to the market. For beta to provide any insight, the “market” used as a benchmark should be related to the stock. For example, calculating a bond ETF’s beta by using the S&P 500 as the benchmark isn’t helpful because bonds and stocks are too dissimilar.
The benchmark or market return used in the calculation needs to be related to the stock because an investor is trying to gauge how much risk a stock is adding to a portfolio. A stock that deviates very little from the market doesn’t add a lot of risk to a portfolio, but it also doesn’t increase the theoretical potential for greater returns.
Novus' Take:
The Novus Platform risk analysis tool provides deep insight into your portfolio’s risk exposures as well as customized stress/scenario analysis available on both a single-factor and multi-factor basis.
All risk numbers are fit using the trailing 36 months in monthly mode and one year (or 252 trading days) returns in daily mode. For securities that don’t have the required number of datapoints we backfill using proxied returns estimated from the closest asset class / sector and geographic benchmark.
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