# market beta as one

Could anyone justify why beta of market is alaways one

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Lets first understand market portfolio to understand beta of 1. Market portfolio is considered to be a well diversified portfolio and having no ideocentric (unsystematic) risk.

Beta measures sensitivity of a stock towards the market portfolio (or for that matter sensitivity of any variable against the benchmark or another variable). i.e. how much will a stock move up or down given the movement in market portfolio.

In stocks parlance, the market portfolio is a well diversified benchmark - its sensitivity to itself will always be one.

Hope this explains :)

Beta measures … how much will a stock move up or down given the movement in market portfolio.

What do you mean when you say, “how much the stock move[s] up or down”?

It sounds as though you’re talking about stock prices vs. the price of the market, which is most definitely not what beta measures.

Beta measures the average change in the stock’s return compared to a change in the market’s return.

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PRAKHAR SINGH wrote:
Could anyone justify why beta of market is alaways one

Beta measures the slope of a regression line, with the market’s return on the horizontal axis and the return of the security or portfolio of interest on the vertical axis.

So … if you plot the market’s return (the portfolio of interest) against the market’s return, what’s the slope of the regression line?  More simply, if the market’s return increases by 1%, by how much (on average) does the market’s return increase?

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Just want to understand is the beta is   regression equity returns against Market risk or is it against Market risk premium .

In  multifactor  model Beta is regression against Market risk premium or just market.

Thanks

Market return on the horizontal axis, security (or portfolio) return on the vertical axis.

I should have mentioned that earlier.

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So is the horizontal line only Market return ( which contains risk free rate ) or Market premium return.

Or as we are calculating slope any Risk free rate is cancelled out in calculating slope ( Rm1- Rf - ( Rm2-Rf) as horizontal line.

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So is the horizontal line only Market return ( which contains risk free rate ) or Market premium return.

Or as we are calculating slope any Risk free rate is cancelled out in calculating slope ( Rm1- Rf - ( Rm2-Rf) as horizontal line.

Customarily, it’s the market return on the horizontal axis.

For the purpose of calculating beta, however, it could be the market return less the risk-free rate; that won’t change the slope of the regression line.

Simplify the complicated side; don't complify the simplicated side.

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Thank you .

My pleasure.

Simplify the complicated side; don't complify the simplicated side.

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http://financialexamhelp123.com/