Definition Of Investment

Investment can be defined as the current commitment of dollars for a period of time in order to derive future payments that will compensate the investor for (i) the time the funds are committed, (ii) the expected rate of inflation during this time period, and (iii) the uncertainty of the future payments. The “investor” can be an individual, a government, a pension fund, or a corporation. Similarly, this definition includes all types of investments, including investments by corporations in plant and equipment and investments by individuals in stocks, bonds, commodities, or real estate. This text emphasizes investments by individual investors. In all cases, the investor is trading a known dollar amount today for some expected future stream of payments that will be greater than the current dollar amount today.

Hence, the question is why people invest and what they want from their investments. They invest to earn a return from savings due to their deferred consumption. They want a rate of return that compensates them for the time period of the investment, the expected rate of inflation, and the uncertainty of the future cash flows. This return, the investor’s required rate of return, is discussed throughout this book. A central question of this book is how investors select investments that will give them their required rates of return.

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What Is Beta?

Beta (β) is a Greek alphabet used in finance to denote the volatility or systematic risk of a security or portfolio compared to the market.

# HOW BETA WORKS

A beta coefficient shows the volatility of an individual stock compared to the systematic risk of the entire market. Beta represents the slope of the line through a regression of data points. In finance, each point represents an individual stock's returns against the market.

Beta effectively describes the activity of a security's returns as it responds to swings in the market. It is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets. CAPM is used to price risky securities and to estimate the expected returns of assets, considering the risk of those assets and the cost of capital.

# HOW TO CALCULATE BETA?

A security's beta is calculated by dividing the product of the covariance of the security's returns and the market's returns by the variance of the market's returns over a specified period. The calculation helps investors understand whether a stock moves in the same direction as the rest of the market. It also provides insights into how volatile–or how risky–a stock is relative to the rest of the market.

# WHAT ARE THE BETA VALUES?

Beta Equal to 1; A stock with a beta of 1.0 means its price activity correlates with the market. Adding a stock to a portfolio with a beta of 1.0 doesn’t add any risk to the portfolio, but doesn’t increase the likelihood that the portfolio will provide an excess return.

Beta Less than 1; A beta value less than 1.0 means the security is less volatile than the market. Including this stock in a portfolio makes it less risky than the same portfolio without the stock. Utility stocks often have low betas because they move more slowly than market averages.

Beta Greater than 1; A beta greater than 1.0 indicates that the security's price is theoretically more volatile than the market. If a stock's beta is 1.2, it is assumed to be 20% more volatile than the market. Technology stocks tend to have higher betas than the market benchmark. Adding the stock to a portfolio will increase the portfolio’s risk, but may also increase its return.

Negative Beta; A beta of -1.0 means that the stock is inversely correlated to the market benchmark on a 1:1 basis. Put options and inverse ETFs are designed to have negative betas. There are also a few industry groups, like gold miners, where a negative beta is common.

Investors commonly evaluate two categories of risk. Systematic risk is the risk of the entire market declining, called un-diversifiable. Unsystematic, or diversifiable risk, is the uncertainty associated with an individual stock or industry. It is risk related to a company or sector and can be mitigated through diversification.

# IS BETA A GOOD MEASURE OF RISK?

Beta can provide some risk information, but it is not an effective measure of risk. Beta only looks at a stock's past performance relative to the S&P 500 and does not predict future moves. It also does not consider the fundamentals of a company or its earnings and growth potential.

# HOW DO INVESTORS INTERPRET A STOCK'S BETA?

A Beta of 1.0 for a stock means it has been as volatile as the broader market. If the index moves up or down 1%, so too would the stock, on average. Betas larger than 1.0 indicate greater volatility - so if the beta were 1.5 and the index moved up or down 1%, the stock would have moved 1.5%, on average. Betas less than 1.0 indicate less volatility: if the stock had a beta of 0.5, it would have risen or fallen just half a percent as the index moved 1%.

# IS BETA A HELPFUL MEASURE FOR LONG TERM INVESTMENTS?

While beta can offer useful information when evaluating a stock, it does have some limitations. Beta can determine a security's short-term risk and analyze volatility. However, beta is calculated using historical data points and is less meaningful for investors looking to predict a stock's future movements for long-term investments. A stock's volatility can change significantly over time, depending on a company's growth stage and other factors. 

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Definition Of Behavioral Finance

 Behavioral finance can be defined as the study of investors’ psychology that impacts while making investment decision in the securities markets. It focuses on different psychological biases such as overconfidence, loss aversion, confirmation, anchoring and so on which directly impact investors’ decision making process on a particular security’s buying or selling.

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What Is Portfolio?

There is a saying that “Don’t keep all the eggs in a basket”. Suppose you keep many eggs in a basket. If basket falls, all eggs of the basket may be damaged at a time. But if you keep some of them in the different basket, one may be fallen down, rest will remain safe.  

Similarly, for investment, whole of your funds if you invest in a single security, price of the security goes down or becomes more volatile your investment may be lost. This is why you should invest funds into different securities or assets to minimize the risk and maximize the profit. It means risks should be diversified. So portfolio is the management and investment the whole funds into different securities or assets to diversify the risks and gain optimum level of profit.

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Definition Of Finance

Finance can be defined as the processes of planning and implementing on; from where to collect the funds (sources), how to utilize the funds (disbursement or investment), how to generate income from there (cost & inflows) and how to overall manage the funds (assets management and control).

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