Beta of France Telecom

The fact that risk matters and significantly affects how investors and managers make decisions is incontestable. Measuring of investment risk is one of the critical steps towards risk management. Risk is part and parcel of human activity, and more so in the field of investment (Shefrin and Statman, 2015). Investment managers and investors rely heavily on several main measures of investment risk while making important financial decisions (Peirson et al, 2015). The main indicators include standard deviation, the Sharpe ratio, r-squared, alpha, and beta. These indicators are predictors of risk or volatility of an investment and form key components of the modern portfolio theory (MPT) (Szego, 2015). This theory is an academic and financial methodology that is used to assess the performance of mutual fund, fixed- income, and equity investments by [making comparisons with market benchmarks (Markowitz, 2013). All these measures help investors and managers to determine the risk-reward parameters. This essay will discuss why beta is an appropriate measure of risk of investment. In particular, it will discuss the beta of France Telecom. Investors and managers are largely aware that there are risks that their investments face at any given time. They use various measures of risk to make decisions; while they may combine all the measures, they can use each measure in isolation. Beta is one of the most popular measures of investment risk (Perold, 2013). It is a measure of the systemic risk or volatility of a portfolio or security in comparison to the market. Calculation of beta is done using regression analysis, and is considered as a tendency of return on investment responding to market swings (Fama and French, 2014). The market is considered to have a beta of 1.0, and individual portfolio and security values are measured based on their deviation from the market. If a portfolio swings less than the market, then its beta is below 1.0. Conversely, if a stock moves more than the market over a period of time, then it has a beta more than 1.0. This measure holds that high-beta portfolios are riskier but are likely to provide higher returns. On the other hand, low-beta portfolios are supposed to be less riskier but with lower returns…

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