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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 :)

kaushikbhadresha wrote:
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.

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

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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?

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

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