Final answer:
The beta coefficient represents the relative sensitivity of a stock's return compared to the market's return, which helps investors understand the stock's risk and potential performance.
Step-by-step explanation:
The beta coefficient can best be described as the relative sensitivity of a stock's return to the market's return. It measures how much a stock's price is expected to change when the overall market changes. For instance, a stock with a beta of 1 is expected to move in sync with the market. If the market goes up by 1%, the stock should also go up by approximately 1%. If the beta is greater than 1, the stock is seen as more volatile than the market, while a beta less than 1 indicates a stock less volatile than the market.
To clarify a common misconception, a high-risk investment does not necessarily equate to a low return; it often means there's a higher, but more variable, expected rate of return to compensate for the increased risk. Such investments demonstrate a wide range of potential outcomes, and the beta coefficient is one of the measures investors use to gauge this risk and predict performance relative to the market.
The beta coefficient can best be described as the relative sensitivity of a stock's return to the market's return. It measures how much a stock's price moves relative to movements in the overall market. A beta coefficient greater than 1 indicates that a stock is more volatile than the market, while a beta coefficient less than 1 indicates that a stock is less volatile than the market.