Measuring Systematic Risk

Because systematic risk is the crucial determinant of an asset's expected return, we need some way of measuring the level of systematic risk for different investments. The specific measure we will use is called the beta coefficient, for which we will use the Greek symbol p. A beta coefficient, or beta for short, tells us how much systematic risk a particular asset has relative to an average asset. By definition, an average asset has a beta of 1.0 relative to itself. An asset with a beta of .50, therefore, has half as much systematic risk as an average asset; an asset with a beta of 2.0 has twice as much.

Table 13.8 contains the estimated beta coefficients for the stocks of some well-known companies. (This particular source rounds numbers to the nearest .05.) The range of betas in Table 13.8 is typical for stocks of large U.S. corporations. Betas outside this range occur, but they are less common.

The important thing to remember is that the expected return, and thus the risk premium, on an asset depends only on its systematic risk. Because assets with larger betas have greater systematic risks, they will have greater expected returns. Thus, from Table 13.8, an investor who buys stock in Exxon, with a beta of .75, should expect to earn less, on average, than an investor who buys stock in General Motors, with a beta of about 1.05.

One cautionary note is in order: not all betas are created equal. Different providers use somewhat different methods for estimating betas, and significant differences sometimes occur. As a result, it is a good idea to look at several sources. See our nearby Work the Web box for more on beta.

beta coefficient

The amount of systematic risk present in a particular risky asset relative to that in an average risky asset.

Total Risk versus Beta

Consider the following information on two securities. Which has greater total risk? Which has greater systematic risk? Greater unsystematic risk? Which asset will have a higher risk premium?

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