Betas for individual stocks, which can be explained as the riskiness of that sto

Question

Betas for individual stocks, which can be explained as the riskiness of that stock when held as a component of a diversified portfolio, can be determined by simple linear regression. The beta for the stock is the slope of the estimated regression equation (b1) when the stocks returns are regressed on the total market's returns. Since the market as a whole has a beta of 1, stocks with betas greater than 1 are considered riskier than average and stocks with betas less than 1 are considered less risky than average. The total market return index, the Wilshire 5000, is a good measure of the total return for the stock market.

Will the total market return index always have a beta of 1? Why or why not?

Explanation / Answer

If you compare the returns of the total market return index with Wilshire 5000, the beta will always be on because Wilshire 5000 in itself is the aggregation of the stocks in the stock market. But if you compare Beta of Wilshire 5000 with some other market index like S&P etc, it might not be the case.

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