From the course: Corporate Finance Foundations
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Beta: The concept
- Risk, in business, it's everywhere. You can work to reduce risk or to price risk, but there are some risks that you can't do anything about. For example, during 2008 and 2009, there was a global economic recession. Everyone everywhere in the world was impacted. There was no way to avoid that risk. Risk that you can do nothing about is called beta risk. Beta measures the market-wide risk that cannot be eliminated through diversification because it happens to everybody. To get us into measuring this type of risk, it's time to talk about what is probably the most famous finance model, the Capital Asset Pricing Model, or the CAPM. Now, rather than jump right into the CAPM, we will first examine it's pieces, and then once we understand the pieces, we'll pull them all together. This infamous model starts with some simple insights. We know that investors are risk averse, so you have to compensate them to get them to accept risk.…
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