Calculating Beta Flashcards
What do you have to know for calculating beta?
t stat of the coefficients whether they are statistically significant or not (p value basically means the probability of that coefficient being 0 or insignificant)
You need to look at the R-sq, this basically explain how good fit is the line.
Regression Sum Sq + Error Sum Sq = Total Sum Sq
Systematic (market) risk is calculated in 2 ways.
a) Regression Sum Sq / n-1
b) βsq * variance of error term (where variance of error term is calculated by Error Sum Sq devided by n-2)
error term is unsystematic or idiosyncratic risk that cannot be explained by market and it can be eliminated by diversification
Beta of a portfolio can be calculated 2 ways
regress the portfolio return against market return to get the beta of portfolio or find out each stock’s beta then sum them up by their stock wright in the portfolio.
By adding a stock into portfolio we can reduce the idiosyncratic risk, but cant get rid of the systemic risk
