Conversely, an investor who is risk-averse may have less tolerance for volatility and instead favor low-beta investments. An investor who’s targeting higher returns or has a longer investment horizon may, therefore, be more willing to invest in higher beta investments. Finally, a beta in excess of one would indicate that a stock’s value has been more volatile than the broad market.Īccording to standard financial theory, investments with higher expected returns tend to be more volatile.

The final step is to add the risk free return (10 year bond yield) and expected risk premium for Facebook to get Facebook’s cost of equity. A beta closer to zero would indicate that a stock has often been less volatile than the market and not experienced such wide swings in value. Equity Risk Premium beta expected market return 1.141 7.434 8.482194. The concept of beta simply puts these kinds of observations on a firmer mathematical footing, quantifying (on a scale that starts at zero) how sensitive a particular investment has been to moves in the broader market.Ī beta of one indicates that a particular stock has tended to move up and down, generally in lockstep, with the broader market. For example, if Sensex rises (or falls) by 10, a stock with a beta of 1.2 will probably increase (or decrease) by 12 and a beta of 1.5 will likely increase (or decrease) by 15. Volatility implies risk, and so beta indirectly is a measure of risk. In contrast, small-cap stocks from the biotech or information technology sectors have often tended to be more volatile, experiencing proportionately larger swings in value than the broad market. Beta is a measure of volatility and not a direct measure of risk. For example, prices for utilities stocks have often tended to be more stable than the broader market. Many investors already have an intuitive sense of beta in terms of the “riskiness” of different types of stock. Think of it as a tool that can help investors make decisions about mutual funds, stocks and other investments that are better aligned with their own appetite for risk. Codorniou has been with Workplace since its beta launch in 2015, building on. It’s, therefore, a very useful risk measure. How Julien Codorniou built an enterprise software startup inside Facebook. Beta describes how volatile an individual investment is compared to the broader market. Of the handful of standard measures of investment risk, beta is one of the most widely used.

Facebook beta risk