A measure of volatility relative to the market; higher values equate to greater volatility with 1.0 being market equivalence
Beta (alternately called "beta coefficient") is a measure of how volatile a security's price is relative to the market in general. A beta of 1.0 indicates that the security's price is as volatile as (i.e. equivalently susceptible to) the market's fluctuations in general. A higher beta indicates greater volatility and a lower beta indicates less volatile movement.
In practical terms, beta is used to gauge the risk/return of a security or portfolio; higher values equate to greater risk and potential returns relative to the overall market.
A security's difference in beta value from 1.0 can be thought of as a percentage of volatility, with a stock posting a beta of 1.75 being 75% more volatile than the market, and a stock posting a beta of .7 being 30% less volatile than the market.
A negative beta indicates a security's movement is inverse to the market's. Precious metals often post negative beta values, as their value tends to increase when the market is down, and vice versa.
Beta is calculated using regression analysis.
[edit] Examples
- Company ABC, a tech stock, has a beta of 1.8. Over a given year, the NASDAQ Composite Index increases in value 17%. Assuming the beta value is accurate, ABC's value would have increased 30.1% over the same time period.
- Company XYZ, a mid-sized oil company, has a beta of 1.0. Over a given year, the S&P 500 Index falls 8%. Assuming the beta value is accurate, XYZ's value would also fall 8% over that period.
- Company LMN, a gold mining company, has a beta of -1.4. Over a given year, the S&P 500 Index increases in value 11%. Assuming the beta value is accurate, LMN's value would have declined 15.4% over that same period.
Beta
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