Uses of beta

The most obvious use of beta is to value securities using CAPM. The discount rate calculated for CAPM is the required return on equity, and is also therefore used to calculate the weighted average cost of capital (WACC), which is typically used within companies to assess the profitability of projects.

The advantage of the use of WACC is that is uses a measure that reflects the risk shareholders take. The beta may need to be adjusted under certain circumstances, for example if the project is more of less cyclical than the rest of the company, or it has high operational gearing. See WACC for more.

The other major use of beta is as the risk measure for assessing portfolio risk and fund manager performance. The portfolio beta is used in measures such as the Treynor index or Jensen's Alpha.

There are other useful risk measures for (such as the Sharpe ratio and Sortino ratio)

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