Beta and company specific risk

From Kaplan:

I thought Beta is a company-specific risk measure?

It is a measure of a specific company’s systematic risk.

From Investopedia: " Systematic risk , also known as market risk, is the risk that is inherent to the entire market, rather than a particular stock or industry sector."

So if the degree of systematic risk is high, Company X’s Beta will increase?


Beta tells you the degree to which the systematic risk – the risk inherent in the market – translates into risk in a particular stock or portfolio. Beta is the slope of a regression line: market return on the horizontal axis, a given stock’s or portfolio’s returns on the vertical axis. The larger the beta, the greater the average change in the stock’s or portfolio’s return given a fixed change in the market’s return. Beta tells you nothing about the volatility of the market’s returns, and nothing about the stock’s or portfolio’s returns (in an absolute sense).

The definition of beta is:

\beta = \frac{COV\left(stock's\ returns,\ market's\ returns\right)}{\sigma^2_{market's\ returns}}

A little algebra gives a more useful formula:

\beta = \rho\left(stock's\ returns,\ market's\ returns\right)\left(\dfrac{\sigma_{stock's\ returns}}{\sigma_{market's\ returns}}\right)

That explanation may be your best yet! You have brought immense clarity to me on the Security Market Line.

My pleasure.