It measures the risk (volatility) of individual to till market portfolio. According to the return with the market portfolio’s return, divided by the market portfolio (13 = 0). The co-variance of two assets, he product oil their correlation standard deviations. The co-variance of the market portfolio with itself is the variance of the portfolio. Thus, the assets of the market portfolio be one. This is all others portfolios assets in risk classes, with more than one are called defensive assets beta greater than one are called aggressive assets. Risk-free beta equal to zero.
It may with noted that the beta is average of the included in the portfolio, The weights an the relative in the portfolio. The concept is illustrated in Example 3.7.
Two values of 1.2 have been combined and the proportion beta of the resultant portfolio will he 0.9 (= 0) * (0.7 + 1.2 x 0.2). If the standard deviation of market position is 30 per cent, the standard deviation of the portfolio would he 1.7 percent (= 0.9 x 30), This shows portfolio risk (standard deviation) i, driven by security betas.