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The Importance of Beta

I am trying to find out the importance of Beta. I also need to know what kind of investor would invest in high beta and low beta stocks.

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Dear Student:

The beta coefficient has a very important role in portfolio management.

By definition, beta is the amount of systematic risk present in a particular asset relative to that in an average risky asset. The average risky asset refers to the market beta, and market beta always equals one (bM = 1). A stock with a lower risk has a beta below 1, and a stock with a higher risk has a beta of over 1.

Betas for a few companies, as of today (1/29/2013) at www.finance.yahoo.com

Johnson & Johnson (JNJ) 0.44 (ticker in parenthesis)
Amazon (AMZN) 0.91
Microsoft (MSFT) 1.17
Google (GOOG) ...

Solution Summary

This solution explains the meaning of the beta coefficient of stocks and discusses the meaning of beta for the investor, as it relates to the volatility of stocks. The solution also includes the beta of a few commonly known companies and the information on how to find the beta for publicly traded stocks.

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