A beta coefficient is a measure of a stock’s volatility relative to the market for all stocks. As an integral component of the theoretical capital ASSET pricing model that is used to determine the required return for a particular stock, beta coefficients are measures of a stock’s risk. The beta coefficient for all stocks collectively is 1, and a stock whose returns move with the market has a beta of 1. Thus, a beta coefficient of 1 indicates average volatility, and stocks with betas of 1 carry the same risk as the STOCK MARKET in general. If a stock’s returns are more volatile than the average movements in the stock market, its beta is greater than 1. Stocks whose returns are less volatile than the average movements in the market have betas less than 1. (There are some stocks that are countercyclical, and their betas are negative.) Beta coefficients can be easily obtained for all stocks publicly traded. The capital asset pricing model (CAPM) is based on risk aversion, the assumption that investors require compensation for assuming risk. CAPM is an equation used to calculate a stock’s required return based upon the riskiness of that stock as measured by its beta coefficient: ks = krf + (km – krf)bs where ks is the required return for some individual stock s, krf is the theoretic return an investor would require in a risk-free world, km is the average return for all stocks in the market, and bs is the beta coefficient of the stock s. In the model, (km – krf)—the difference between the average return for all stocks and the risk-free rate of return—is the stock market’s average risk premium. The average risk premium is multiplied by a stock’s beta coefficient to determine the risk premium associated with that particular stock. For example, when the beta is 1, the stock will have the same risk premium as the market’s. When the beta is greater than 1, the stock’s risk premium will be greater than the market’s average risk premium, and when the beta is less than 1, the stock’s risk premium will be less than the market’s average risk premium. Thus the CAPM equation indicates that a stock’s required return is the sum of the risk-free rate of return and the risk premium for that stock as determined by that stock’s beta coefficient. For example, assume a risk-free rate of return, krf, of 3 percent and an average return in the stock market, km, of 7 percent. Using the CAPM equation, if Stock A has a beta of 1, its required return, kA, is [3 + (7 – 3)1] = 7 percent. Because Stock A is no more and no less volatile than the stock market in general (indicated by its beta coefficient of 1), the required return for Stock A is the same as the average return in the stock market. If Stock B has a beta of 2, its required return, kB, is [3 + (7 – 3)2] = 11 percent. As indicated by its beta coefficient of 2, Stock B is twice as volatile and twice as risky as the average stock, and higher required return reflects the added riskiness of this stock’s returns. If Stock C has a beta of .5, its required return is 5 percent. Stock C is less volatile and less risky, and as a result it has a lower required return.