The beta of a stock is found by comparing the movements of a stock's price in previous years to changes in a market index, such as the Standard & Poor's 500 index, the Dow Jones Industrial Average or the NASDAQ 100. Stocks that have a beta less than one are less volatile than the overall market.
Full Answer
What does a beta of 0.8 mean?
If the stock is more volatile than the market, its beta will be more than 1, and if it is less volatile than the market, its beta will be less than 1. For example, a stock with a beta of 0.8 would be expected to return 80% as much as the overall market.
What does a beta of 0.75 mean?
Google's change in the market value is multiplied by its beta to estimate its movement in future. Hence, Google is a high beta stock. Similarly, if the beta of any stock is say 0.75, then it will be less volatile than the market. If the intraday gains of the market are 10%, a low beta stock will gain only 7.5%.
What does a beta value of 0.5 mean?
If a stock had a beta of 0.5, we would expect it to be half as volatile as the market: A market return of 10% would mean a 5% gain for the company. Here is a basic guide to beta levels: Negative beta: A beta less than 0, which would indicate an inverse relation to the market, is possible but highly unlikely.
How do you interpret a stock's beta?
A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks are supposed to be riskier but provide higher return potential; low-beta stocks pose less risk but also lower returns.
What is a good beta for a stock?
What Is a Good Beta Value for a Stock? Whether or not a stock has a “good” beta value depends on what you are looking for in a stock. If you're risk averse, then look for a stock with a beta value at or below 1.0. If you're looking for something more exciting, then consider a stock with a value of above 2.0.
What does a beta of 1.5 mean?
Roughly speaking, a security with a beta of 1.5, will have move, on average, 1.5 times the market return. [More precisely, that stock's excess return (over and above a short-term money market rate) is expected to move 1.5 times the market excess return).]
What does a beta of 0.3 mean?
The beta for a stock describes how much the stock's price moves compared to the market. If a stock has a beta above 1, it's more volatile than the overall market. For example, if an asset has a beta of 1.3, it's theoretically 30% more volatile than the market.
What does a beta of 0.9 mean?
The higher a fund's beta, the more volatile it has been relative to its benchmark. A beta that is greater than 1.0 means that the fund is more volatile than the benchmark index. A beta of less than 1.0 means that the fund is less volatile than the index.
What is considered a low beta stock?
A beta value that is less than 1.0 means that the security is theoretically less volatile than the market. Including this stock in a portfolio makes it less risky than the same portfolio without the stock. For example, utility stocks often have low betas because they tend to move more slowly than market averages.
What is considered a high-beta?
What are high-beta stocks? A high-beta stock, quite simply, is a stock that has been much more volatile than the index it's being measured against. A stock with a beta above 2 -- meaning that the stock will typically move twice as much as the market does -- is generally considered a high-beta stock.
How do I find high-beta stocks?
Finding beta of a stock using formulaGet the historical prices for the desired stock.Get the historical prices for the comparison benchmark index.Calculate % change for the same period for both the stock and the benchmark index. ... Calculate the Variance of the stock.Find the covariance of the stock to the benchmark.
What does high-beta mean?
High-beta definition A high level of volatility and therefore risk; used to refer to investments. While high-beta investments tend to outperform the market when the market is going up, they also will accelerate their losses when the market moves down. Stocks with a beta above 1 are considered to have a high-beta.
What does it mean when a stock has a beta of over 100?
If you see a beta of over 100 on a research site it is usually a statistical error or the stock has experienced a wild and probably fatal price swing. For the most part, stocks of established companies rarely have a beta higher than 4.
What does a beta of 1 mean?
A beta of 1 indicates that the security's price tends to move with the market. A beta greater than 1 indicates that the security's price tends to be more volatile than the market. A beta of less than 1 means it tends to be less volatile than the market.
What Is the Beta?
The value of any stock index , such as the Standard & Poor's 500 Index, moves up and down constantly. At the end of the trading day, we conclude that "the markets" were up or down. An investor considering buying a particular stock may want to know whether that stock moves up and down just as sharply as stocks in general. It may be inclined to hold its value on a bad day or get stuck in a rut when most stocks are rising.
Why should gold stocks have negative beta?
Some investors argue that gold and gold stocks should have negative betas because they tend to do better when the stock market declines.
Why is beta important?
Using beta to understand a security's volatility can help you choose the securities that meet your criteria for risk.
What does a beta of utility mean?
Many utility sector stocks have a beta of less than 1. Essentially, beta expresses the trade-off between minimizing risk and maximizing return. Say a company has a beta of 2. This means it is two times as volatile as the overall market. We expect the market overall to go up by 10%.
What is the beta of a young technology company?
Many young technology companies that trade on the Nasdaq stocks have a beta greater than 1. Many utility sector stocks have a beta of less than 1.
What does beta mean in investing?
Of course, when investors consider risk, they are thinking about the chance that the stock they buy will decrease in value. The trouble is that beta, as a proxy for risk, doesn't distinguish between upside and downside price movements. For most investors, downside movements are a risk, while upside ones mean opportunity.
What Is Beta?
Beta is a measure of a stock's volatility in relation to the overall market. By definition, the market, such as the S&P 500 Index, has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market.
How should investors assess risk in the stocks that they buy or sell?
How should investors assess risk in the stocks that they buy or sell? While the concept of risk is hard to factor in stock analysis and valuation, one of the most popular indicators is a statistical measure called beta. Analysts use it often when they want to determine a stock's risk profile. However, while beta does say something about price risk, it has its limits for investors looking to determine fundamental risk factors.
Why do value investors dislike beta?
Value investors scorn the idea of beta because it implies that a stock that has fallen sharply in value is riskier than it was before it fell. A value investor would argue that a company represents a lower-risk investment after it falls in value—investors can get the same stock at a lower price despite the rise in the stock's beta following its decline. Beta says nothing about the price paid for the stock in relation to fundamental factors like changes in company leadership, new product discoveries, or future cash flows.
What is beta in CAPM?
Beta is a component of the capital asset pricing model (CAPM), which is used to calculate the cost of equity funding. The CAPM formula uses the total average market return and the beta value of the stock to determine the rate of return that shareholders might reasonably expect based on perceived investment risk.
Why is beta important?
To followers of CAPM, beta is useful. A stock's price variability is important to consider when assessing risk. If you think about risk as the possibility of a stock losing its value, beta has appeal as a proxy for risk. Intuitively, it makes plenty of sense.
Why do analysts use beta?
Analysts use it often when they want to determine a stock's risk profile. However, while beta does say something about price risk, it has its limits for investors looking to determine fundamental risk factors.
How to find the beta of a stock?
Now, use a covariance formula to compare how the stock’s and index’s prices move in relation to each other. Divide this covariance result by the variance of only the index. This allows you to see how the stock and index prices moved in relation to one another, relative to how the index price moved on its own. Therefore, you get beta.
What is beta in stock?
Beta can be a useful metric to determine how a stock’s price may move in relation to the overall market by examining its past performance. It can also be a useful indicator of risk, especially for investors who make trades frequently. However, beta has its limitations.
Why is beta high?
A stock with a high beta indicates it’s more volatile than the overall market and can react with dramatic share-price changes amid market swings. So if you don’t have the stomach for vast price changes, you may want to avoid investing in high-beta stocks.
What does beta mean in stock market?
Beta is represented as a number. Based on beta analysis, the overall stock markethas a beta of 1. And the beta of individual stocks determines how far they deviate from the broader market. A stock with a beta equal to 1 assumes its price moves hand-in-hand with the market.
What does it mean when a stock has a beta of less than 1?
If the stock has a beta less than 1, you can conclude that it’s less volatile than the overall market. This means that adding it to your portfolio may mitigate risk and may help in diversifying your investments.
What is beta in investing?
Nonetheless, beta can be one of many useful tools to have when evaluating your investments. So it’s important to at least calculate the beta of a stock you may be interested in purchasing. Before You Calculate Beta. Remember, beta measures how volatile a stock’s price may be in relation to a market benchmark. ...
What does it mean when a beta is below 1?
Betas can also dip below 1 into negative territory. This indicates that the stock may respond in the opposite direction of the overall market. Using the previous example, you could expect the stock’s price to go up if the S&P 500 goes down and vice versa.
What does beta mean in Bloomberg?
When you look up a company’s beta on Bloomberg, the default number you see is levered, and it reflects the debt of that company. Since each company’s capital structure is different, an analyst will often want to look at how “risky” the assets of a company are regardless of the percentage of its debt or equity funding.
What are Equity Beta and Asset Beta?
Levered beta, also known as equity beta or stock beta, is the volatility of returns for a stock, taking into account the impact of the company’s leverage from its capital structure. It compares the volatility (risk) of a levered company to the risk of the market.
What is leverage beta?
Levered beta (equity beta) is a measurement that compares the volatility of returns of a company’s stock against those of the broader market. In other words, it is a measure of risk and it includes the impact of a company’s capital structure and leverage. Equity beta allows investors to assess how sensitive a security might be to macro-market risks. For example, a company with a β of 1.5 denotes returns that are 150% as volatile as the market it is being compared to.
How to find levered beta?
There are two ways to estimate the levered beta of a stock. The first, and simplest, way is to use the company’s historical β or just select the company’s beta from Bloomberg. The second, and more popular, way is to make a new estimate for β using public company comparables. To use the comparables approach, the β of comparable companies is taken from Bloomberg and the unlevered beta for each company is calculated.
Why is equity beta called equity beta?
It is also commonly referred to as “equity beta” because it is the volatility of an equity based on its capital structure. Capital Structure Capital structure refers to the amount of debt and/or equity employed by a firm to fund its operations and finance its assets. A firm's capital structure.
What is asset beta?
Unlevered Beta / Asset Beta Unlevered Beta (Asset Beta) is the volatility of returns for a business, without considering its financial leverage. It only takes into account its assets. , on the other hand, only shows the risk of an unlevered company relative to the market.
How to calculate the weekly return of a stock?
Follow these steps to calculate β in Excel: 1 Obtain the weekly prices of the stock 2 Obtain the weekly prices of the market index (i.e. S&P 500 Index) 3 Calculate the weekly returns of the stock 4 Calculate the weekly returns of the market index 5 Use the Slope function and select the weekly returns of the market and the stock, each as their own series 6 Congrats! The output from the Slope function is the β
How to find the beta of a stock?
Now, use a covariance formula to compare how the stock’s and index’s prices move in relation to each other. Divide this covariance result by the variance of only the index. This allows you to see how the stock and index prices moved in relation to one another, relative to how the index price moved on its own. Therefore, you get beta.
What does a stock's beta mean?
A stock with a beta greater than 1 may indicate that it’s more volatile than the market. However, this could also mean it has the potential for stronger returns. Say your benchmark, or the market to which you’re comparing a stock, is the S&P 500. If the stock you’re analyzing has a beta of 2, that means the stock is twice as volatile as the market. If the S&P 500 goes up by 10% next year, you can expect the stock price to go up by 20%. However, it could plummet by just as much if the S&P 500 goes down by 10%.
What does beta mean in stock market?
Beta is represented as a number. Based on beta analysis, the overall stock market has a beta of 1. And the beta of individual stocks determines how far they deviate from the broader market. A stock with a beta equal to 1 assumes its price moves hand-in-hand with the market.
What does a high beta mean in stocks?
Beta measures how volatile a stock is in relation to the broader stock market over time. A stock with a high beta indicates it’s more volatile than the overall market and can react with dramatic share-price changes amid market swings. So if you don’t have the stomach for vast price changes, you may want to avoid investing in high-beta stocks.
What does it mean when a beta is below 1?
Betas can also dip below 1 into negative territory. This indicates that the stock may respond in the opposite direction of the overall market. Using the previous example, you could expect the stock’s price to go up if the S&P 500 goes down and vice versa.
What does it mean to have a high beta?
In essence, it would have a high beta and mean more risk.
What is the best stock index for a large company?
So if you’re examining the stock of a a large U.S. company, a good choice would be the S&P 500. This market index covers the 500 U.S. companies with the largest market capitalization. But if you’re looking at the stock of a company that’s more active overseas, you may want to use an international market index instead.
What is beta in stocks?
Beta is a measure of the volatility — or systematic risk — of a security or portfolio compared to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets (usually stocks). CAPM is widely used as a method for pricing risky securities ...
What does it mean when a stock has a beta of less than 1.0?
Beta Value Less Than One. A beta value that is less than 1.0 means that the security is theoretically less volatile than the market. Including this stock in a portfolio makes it less risky than the same portfolio without the stock.
What Is Beta?
Beta is a measure of the volatility — or systematic risk — of a security or portfolio compared to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets (usually stocks). CAPM is widely used as a method for pricing risky securities and for generating estimates of the expected returns of assets, considering both the risk of those assets and the cost of capital.
What does a negative beta mean in stocks?
Some stocks have negative betas. A beta of -1.0 means that the stock is inversely correlated to the market benchmark . This stock could be thought of as an opposite, mirror image of the benchmark’s trends. Put options and inverse ETFs are designed to have negative betas. There are also a few industry groups, like gold miners, where a negative beta is also common.
Why is beta important?
Beta is useful in determining a security's short-term risk, and for analyzing volatility to arrive at equity costs when using the CAPM. However, since beta is calculated using historical data points, it becomes less meaningful for investors looking to predict a stock's future movements.
How does beta work?
How Beta Works. A beta coefficient can measure the volatility of an individual stock compared to the systematic risk of the entire market. In statistical terms, beta represents the slope of the line through a regression of data points.
What does R squared mean in stock?
R-squared is a statistical measure that shows the percentage of a security's historical price movements that can be explained by movements in the benchmark index. When using beta to determine the degree of systematic risk, a security with a high R-squared value, in relation to its benchmark, could indicate a more relevant benchmark.
What is the beta of a stock?
Beta is a measure used in fundamental analysis to determine the volatility of an asset or portfolio in relation to the overall market. The overall market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market.
What Is Beta?
A stock that swings more than the market over time has a beta greater than 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks tend to be riskier but provide the potential for higher returns. Low-beta stocks pose less risk but typically yield lower returns.
How to calculate beta of a security?
To calculate the beta of a security, the covariance between the return of the security and the return of the market must be known, as well as the variance of the market returns. Covariance measures how two stocks move together. A positive covariance means the stocks tend to move together when their prices go up or down.
Why are low beta stocks important?
Low-beta stocks pose less risk but typically yield lower returns. As a result, beta is often used as a risk-reward measure, meaning it helps investors determine how much risk they are willing to take to achieve the return for taking on that risk. A stock's price variability is important to consider when assessing risk.
What is the difference between high and low beta?
A stock that swings more than the market over time has a beta greater than 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks tend to be riskier but provide the potential for higher returns. Low-beta stocks pose less risk but typically yield lower returns. As a result, beta is often used as ...
What is the beta of utility stocks?
Many utility stocks , for example, have a beta of less than 1. Conversely, many high-tech stocks on the Nasdaq have a beta greater than 1, offering the possibility of a higher rate of return, but also posing more risk.
What does it mean when a stock is low beta?
Investors looking for low-risk investments might gravitate to low beta stocks, meaning their prices won't fall as much as the overall market during downturns. However, those same stocks won't rise as much as the overall market during upswings. By calculating and comparing betas, investors can determine their optimal risk-reward ratio for their portfolio.
What is the beta of a stock?
Beta is a way of measuring a stock’s volatility compared with the overall market’s volatility. The market as a whole has a beta of 1. Stocks with a value greater than 1 are more volatile than the market (meaning they will generally go up more than the market goes up, and go down more than the market goes down). Stocks with a beta of less than 1 have a smoother ride as their moves are more muted than the market’s.
How to compare beta of stocks?
Think of comparing the beta of different stocks in the same way you might order food at a restaurant. If you are a more risk-averse investor who is focused on earning income, you might shy away from high-beta stocks the same way that someone with a simpler palate might prefer to order a plain dish with familiar ingredients and flavors. A more aggressive investor with a higher risk tolerance might be more inclined to chase the high-beta stocks the same way an adventurous eater will look for new, spicy dishes with exotic ingredients they have never tried.
Why can't you use beta to evaluate companies?
Because it’s calculated on historical price movements, you can’t use beta to evaluate companies that have plans to go public or young companies that have recently been listed on Wall Street.
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Bankrate follows a strict editorial policy, so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.
Is beta good or bad?
Beta allows for a good comparison between an individual stock and a market-tracking index fund, but it doesn’t offer a complete portrait of a stock’s risk. Instead, it’s a look at its level of volatility, and it’s important to note that volatility can be good and bad. Investors aren’t complaining about upward price movements. The downward price movement, of course, will keep people up at night.
Does beta include qualitative factors?
Numbers aren’t everything: Beta doesn’t include qualitative factors that can play a significant role in a company’s outlook. Did that renowned CEO step down during those three years? Now that the succession plan is in place, perhaps the future will look quite a bit different.
What Is Beta?
Calculating Beta
- Beta is calculated using regression analysis. Numerically, it represents the tendency for a security's returns to respond to swings in the market. The formula for calculating beta is the covariance of the return of an asset with the return of the benchmarkdivided by the variance of the return of the benchmark over a certain period. Beta=CovarianceVariance\text{Beta} = \frac{\text…
The Advantages of Beta
- To followers of CAPM, beta is useful. A stock's price variability is important to consider when assessing risk. If you think about risk as the possibility of a stock losing its value, beta has appeal as a proxy for risk. Intuitively, it makes plenty of sense. Think of an early-stage technology stock with a price that bounces up and down more than the market. It's hard not to think that stock wil…
The Disadvantages of Beta
- If you are investing based on a stock's fundamentals, beta has plenty of shortcomings. For starters, beta doesn't incorporate new information. Consider a utility company: let's call it Company X. Company X has been considered a defensive stockwith a low beta. When it entered the merchant energy business and assumed more debt, X's historic beta no longer captured the …
Assessing Risk
- The well-worn definition of risk is the possibility of suffering a loss. Of course, when investors consider risk, they are thinking about the chance that the stock they buy will decrease in value. The trouble is that beta, as a proxy for risk, doesn't distinguish between upside and downsideprice movements. For most investors, downside movements are a risk, while upside ones mean oppor…
The Bottom Line
- Ultimately, it's important for investors to make the distinction between short-term risk—where beta and price volatility are useful—and longer-term, fundamental risk, where big-picture risk factors are more telling. High betas may mean price volatility over the near term, but they don't always rule out long-term opportunities.
Examples of Beta
Calculation
- Below is an Excel β calculator that you can download and use to calculate β on your own. β can easily be calculated in Excel using the Slope function. Follow these steps to calculate β in Excel: 1. Obtain the weekly prices of the stock 2. Obtain the weekly prices of the market index (i.e., S&P 500 Index) 3. Calculate the weekly returns of the stock 4. Calculate the weekly returns of the market i…
What Are Equity Beta and Asset Beta?
- Levered beta, also known as equity beta or stock beta, is the volatility of returns for a stock, taking into account the impact of the company’s leverage from its capital structure. It compares the volatility (risk) of a levered company to the risk of the market. Levered beta includes both business risk and the risk that comes from taking on debt. It is also commonly referred to as “eq…
Levered Beta vs Unlevered Beta
- Levered beta (equity beta) is a measurement that compares the volatility of returns of a company’s stock against those of the broader market. In other words, it is a measure of risk, and it includes the impact of a company’s capital structure and leverage. Equity beta allows investors to assess how sensitive a security might be to macro-market risks. For example, a company with a …
Calculation of Levered Beta
- There are two ways to estimate the levered beta of a stock. The first, and simplest, way is to use the company’s historical β or just select the company’s beta from Bloomberg. The second, and more popular, way is to make a new estimate for β using public company comparables. To use the comparables approach, the β of comparable companies is taken from Bloomberg and the un…
Interpreting Beta
- A security’s β should only be used when its high R-squared value is higher than the benchmark. The R-squared value measures the percentage of variation in the share price of a security that can be explained by movements in the benchmark index. For example, a gold ETF will show a low β and R-squared in relation to a benchmark equity index, as gold is negatively correlated with equit…
Related Readings
- Thank you for reading CFI’s guide to beta (β) of an investment security. To continue learning and advancing your career these additional resources will be helpful: 1. Types of Valuation Multiples 2. Analysis of Financial Statements 3. Leverage Ratios 4. Valuation Methods