What is volatility and how is it measured (beta)?

The topic of this article is to answer the following question: what is volatility and how is it measured?There are a number of different ways to assess volatility, but this particular article will address the risk indicator called beta.

Volatility is really just the risk involved in investing in a particular stock.There are a number of different mathematical models that have been developed by mathematicians, economists, and scientists to try to mathematically pin down the amount of risk associated with a particular stock and whether or not it would be worth it to invest in that stock.Some people don't agree that assessing risk is worth it when deciding whether to buy or sell stock, but some people prefer technical analysis when assessing their portfolios.

Beta is one of the most popular models for measuring risk.Now, while it is used by a number of people, it still has particular shortcomings that should be taken into consideration.Beta is a statistical measure that is used to decide or to determine what the volatility of a fund is when compared to the volatility of its index or its benchmark.If a particular fund has a beta measurement of close to 1, then that means that the volatility of that fund is very close to the volatility of its benchmark.If a beta is higher than one, than the fund or the stock is more voluble than the market, and if the beta is less than one, then the stock or the fund is less voluble, or has less risk, than the overall market.Stocks with a beta of more than 1 swing more than the market.While these stocks are considered to have greater volatility, or to have a greater risk, they also tend to produce a greater potential for higher returns.Conversely, stocks with a beta of less than 1 are less risky but will probably yield lower returns on your investment.

Basically, when investing, you should look at whether the market is bullish or bearish.If the market is bearish, or if you expect it to be bearish, then you should probably choose more stable funds that have a beta of less than 1.These funds will probably decline less in value than the overall market in the near future.If you expect that the market will be bullish, than you might want to consider pursuing the opposite course of action.Invest in stocks or funds with a beta of more than 1 so that you can try to beat the market.

Beta is one of the primary elements that is used when the capital asset pricing model, of CAPM, is calculated.The capital asset pricing model is used when the cost of equity is being calculated.Essentially, if a company has a higher beta, then its cost of capital discount rate will be higher.And when the discount rate is higher, then the company's future cash flows are expected to be lower.Beta has the ability to affect the share valuation of a company.

If you use CAPM, then beta is good for you to use so that you can consider the variability of a stock when assessing its risk. Furthermore, beta will also give you an easy, clear number to use that is easy to understand.The disadvantages of beta are numerous if you are investing in a stock's fundamentals.A beta will not consider new information about a company.It is mostly a historical measure.It will tell you about the past, and will use the past as a picture of the future.Also, a beta can be unreliable because the beta of a single stock will change over time.If you are looking for long term investments, then a beta will not be especially useful for you to consider.