Corporate Finance - How to Interpret the Beta of a Stock

This video shows how to interpret the beta of a stock. Examples of beta from actual firms are presented and interpreted. Firms with a beta greater than one have higher systematic risk than average, whereas firms with a beta less than one have less systematic risk than average. To understand why firms have different levels of systematic risk, consider the following: a grocery store will likely have a beta less than one because in the event of a market downturn people are likely to continue buying food. A company that sells high-end jewelry, however, is likely to have a beta higher than one; when times are good people are eager to purchase luxury goods, but when times are bad people drastically reduce such purchases. If a firm were to have a beta of zero, this would mean that the firm bears no systematic risk; the firm's return is not affected by the return of the market portfolio at all. It is possible for a firm to have a negative beta, although it is rare. This would occur if the firm does very well when the market portfolio does poorly; investing in such a firm would effectively provide insurance against a market downturn. This explains why an investor might choose to invest in such a firm, even though the firm has a return that is less than the risk-free rate according to the Capital Asset Pricing Model. Edspira is your source for business and financial education. To view the entire video library for free, visit http://www.Edspira.com To like us on Facebook, visit https://www.facebook.com/Edspira Edspira is the creation of Michael McLaughlin, who went from teenage homelessness to a PhD. The goal of Michael's life is to increase access to education so all people can achieve their dreams. To learn more about Michael's story, visit http://www.MichaelMcLaughlin.com To follow Michael on Facebook, visit https://facebook.com/Prof.Michael.McLaughlin To follow Michael on Twitter, visit https://twitter.com/Prof_McLaughlin— Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education accessible to all people. — SUBSCRIBE FOR FREE PDF GUIDES TO THE FINANCIAL STATEMENTS, MANAGERIAL ACCOUNTING, TAX, AND MORE * http://eepurl.com/dIaa5z — HIRE THE CREATOR OF EDSPIRA: MICHAEL MCLAUGHLIN, PHD, CPA * https://www.edspira.com/contact/ — GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT * https://edspira.thinkific.com — LISTEN TO THE SCHEME PODCAST * Apple Podcasts: https://podcasts.apple.com/us/podcast/scheme/id1522352725 * Spotify: https://open.spotify.com/show/4WaNTqVFxISHlgcSWNT1kc * Website: https://www.edspira.com/podcast-2/ — GET TAX TIPS ON TIKTOK * https://www.tiktok.com/@prof_mclaughlin — ACCESS INDEX OF VIDEOS * https://www.edspira.com/index — CONNECT WITH EDSPIRA * Facebook: https://www.facebook.com/Edspira * Instagram: https://www.instagram.com/edspiradotcom * LinkedIn: https://www.linkedin.com/company/edspira — CONNECT WITH MICHAEL * Twitter: https://www.twitter.com/Prof_McLaughlin * LinkedIn: https://www.linkedin.com/in/prof-michael-mclaughlin — ABOUT EDSPIRA AND ITS CREATOR * https://www.edspira.com/about/