# 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

- its sensitivity to itself will always be one.benchmarkHope this explains :)

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

what beta measures.notBeta measures the average change in the stock’s

returncompared to a change in the market’sreturn.Simplify the complicated side; don't complify the simplicated side.

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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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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.

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

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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.

Financial Exam Help 123: The place to get help for the CFA® exams

http://financialexamhelp123.com/