Introduction to Beta in Corporate Finance

This video shows what beta is in the context of Corporate Finance. Beta is the percentage change in an asset's return, given a 1% change in the return of the market portfolio (an index such as the S&P 500 is commonly used to proxy for the market portfolio. Beta is important because it measures the amount of systematic risk an asset has. Because unsystematic risk (firm-specific risk) can be diversified away, the systematic risk of an asset is what determines the risk premium demanded by investors for holding the asset. Thus, beta can be used to calculate the cost of a firm's equity capital (for example, with the Capital Asset Pricing Model).

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