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Securities Exchange Act of 1934

See Also:
Secondary Market
Securities Act of 1933
New York Stock Exchange (NYSE)
Primary Market
Sarbanes Oxley Act of 2002 (SOX)

Securities Exchange Act of 1934

The Securities Exchange Act of 1934 deals with the regulation of secondary market transactions, or outstanding securities in the market (which can be traded on a daily basis). The Securities and Exchange Commission (SEC) regulates this act.

Securities Exchange Act of 1934 Meaning

The Securities Exchange Act of 1934 was established after the stock market crash of 1929 – the following Great Depression. The 1934 Securities Exchange Act is meant to provide meaningful and relevant information to the average investor. This ensures that the investor is not mislead in anyway so that they are able to make well informed decisions. The Securities Exchange Act regulations include the need for quarterly and annual audits by an accounting firm. These accounting firms then attest to the accuracy of the statements.

The Securities Exchange Act of 1934 thus ensures that there is no fraud that exist within the company. It also deals with insider trading. If an investor has information that is non-public in nature then, then under the 1934 Securities Exchange Act, he/she may not act on it until the information has gone public. The idea is to provide a fair and equal market so there are no unusual transactions to set the market adrift.

securities exchange act of 1934

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Finance Beta Definition

See Also:
Risk Premium
Hedging Risk
Common Stock
Preferred Stock
Stock Options

Finance Beta Definition

The finance beta definition, or beta coefficient, measures an asset’s sensitivity to movements in the overall stock market. It is a measure of the asset’s volatility in relation to the stock market.

To calculate the beta of an asset, use regression analysis to compare the historic returns of the asset with the historic returns of the stock market. Many often calculate beta using at least five years of historic data.

An asset with a beta of one will fluctuate with the overall stock market. Whereas, an asset with a beta higher than one is more volatile than the stock market. An asset with a beta less than one is less volatile than the stock market. In addition, an asset with a negative beta coefficient moves inversely to the stock market. Beta is used to compute an asset’s expected return in the capital asset pricing model.


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Advantages and Disadvantages of Beta

The advantage of using beta is that it is useful way to gauge an asset’s volatility in relation to the overall stock market. The disadvantage of using beta is that it is based on historical data and may not necessarily be an accurate predictor of future volatility.

Beta of Stocks

The beta of stocks measures that stock’s sensitivity to movements in the overall stock market. More volatile stocks have a beta higher than one; less volatile stocks have a beta less than one.

For example, if a stock has a beta of 1.5, and the return on the overall stock market rises by 10%, then the return on this stock is expected to rise by 15%. (15% = 1.5 x 10%). If a stock has a beta of .5, and the return on the overall stock market rises by 10%, then the return on this stock is expected to rise by only 5%. (5% = .5 x 10%). If a stock has a beta of -1, and the return on the overall stock market rises by 10%, then the return on that stock is expected to decline by 10%. (-10% = -1 x 10%).

Beta of Portfolio

You can also use beta to measure the volatility of an entire portfolio. The beta of a portfolio is simply a weighted average of the assets within the portfolio.

For example, if 50% of the portfolio is comprised of an asset with a beta of .5, and the other 50% of the portfolio is comprised of an asset with a beta of 2, then the portfolio beta would be 1.25. (1.25 = (.5 x .5) + (.5 x 2)).

Similarly, if 25% of the portfolio is comprised of an asset with a beta of .5 and the other 75% of the portfolio is comprised of an asset with a beta of 2, then the beta of the portfolio would be 1.625. (1.625 = (.25 x .5) + (.75 x 2)).

Beta of Market Portfolio

The beta of market portfolio is always one. Because beta measures the sensitivity of an asset to the movements of the overall market portfolio, and the market portfolio obviously moves precisely with itself, its beta is one.

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finance beta definition

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