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Running Head: BETA 2

BETA 2

Beta

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Beta

Wells Fargo & Company has a beta of 1.275. The beta for other companies in the financial industry like M&T bank is 1.232, JPMorgan Chase beta is 1.23, and Morgan Stanley Inc. beta is 1.59. Beta is the measure of the volatility of a stock in relation to the general market. Beta measures the responsiveness of the price of the stock to changes in the general market. The coefficient value of beta has its definition; if the value of beta is precisely one, then it means that it is volatile as that of the market (Economictimes, 2020). If the value of beta is more or less than one, then it means that it can be either less or more volatile than the market. Beta could potentially play a role in making investment decisions. With no precise relationship between beta and return over for the data set, beta seems to be the outcome of other factors and not too useful based on standalone.

Although, if an investor is assessing risk, beta seems to be more useful depending on the used period of returns (Jordan Gaglione, 2015). So, in this case, beta can be used in investment decisions to measure risks, and it is an essential part of the Capital Asset Pricing Model. Higher Beta investments tend to be more volatile and, for that reason, riskier though it provides the potential for higher returns. Low Beta investment present less risk but usually offer lower returns. Some of the investments challenge this idea by providing a lower Beta with a track record of higher returns than the benchmark. The reasons that determine the beta's values and its differentiation between the distinct organizations depend on specific factors on how the beta is calculated.

As various organizations calculate the value of the beta based on various years, there would be a difference in the beta value of various organizations. The calculation of the beta value of 3 years would be distinct from that of the value that is calculated for five years. Another rationale is the company's capital structure that would foresee a difference in the beta value. Companies that have distinct capital structures will have a different beta. For example, a company with less debt financing will have a lower beta than an organization with higher debt financing. The risks that an organization faces also affects its beta. This is why the beta value of JPMorgan Chase is 1.23, which is less than that of the other companies named Wells Fargo and Company, Morgan Stanley Inc, and M&T bank.

References

Economictimes. (2020). Beta. The Economic Times. https://economictimes.indiatimes.com/definition/beta

Jordan Gaglione. (2015, May 4). Home. https://repository.tcu.edu/bitstream/handle/116099117/10326/Jordan_Gaglione_Thesis_Rough_Draft_vF.pdf?sequence=1&isAllowed=y