What is a good beta for a stock?
Key Takeaways. Beta is a concept that measures the expected move in a stock relative to movements in the overall market. A beta greater than 1.0 suggests that the stock is more volatile than the broader market, and a beta less than 1.0 indicates a stock with lower volatility.
What does a beta 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.
Is a 1.5 beta good?
A beta of less than 1.0 indicates that the investment is less sensitive to the market, while a beta of more than 1.0 indicates that the investment is more sensitive to the market. Generally, the higher the correlation between the investment and the market (as measured by R-squared), the more meaningful is beta.
Is a lower or higher beta better?
By definition, the market itself has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the macro market. High-beta stocks (>1.0) are supposed to be riskier but provide the potential for higher returns; low-beta stocks (<1.0) pose less risk but also lower returns.
Is a low beta good?
High And Low Beta Value A low beta value typically means that the stock is considered less risky, but will likely offer low returns as well. The higher the beta value, the more risk you take as an investor, but the higher your chances are of a big return as well.
What is a good PE ratio for stocks?
So, what is a good PE ratio for a stock? A “good” P/E ratio isn't necessarily a high ratio or a low ratio on its own. The market average P/E ratio currently ranges from 20-25, so a higher PE above that could be considered bad, while a lower PE ratio could be considered better.
What is a good EPS?
"The EPS Rating is invaluable for separating the true leaders from the poorly managed, deficient and lackluster companies in today's tougher worldwide competition," O'Neil wrote. Stocks with an 80 or higher rating have the best chance of success.
What is beta stock risk?
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).
What is beta and PE ratio?
The beta measures the risk. The PE ratio gives an indication of the expected future growth – higher PE suggests shareholders are expecting higher future growth – when comparing companies within a particular sector.
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.
Is beta a good measure of risk?
The underlying reason that beta is ineffective as an indicator of risk, or the potential for long-term loss of capital, is that beta is simply a measure of share price volatility. The true risk associated with a company is a result of its business fundamentals.
What does a beta of 0.6 mean?
Teva Pharmaceutical Industry's 2.49 beta, for example, indicates that the stock is expected to be more than twice as volatile than the market, while Intel's beta of 0.6 means the stock will typically move at a rate that's only about half that the broader market (data from Yahoo Finance, June 13, 2019).
What is considered a low beta?
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 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 1.5 indicate?
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 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 is beta in CAPM?
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 ...
What is beta in capital asset pricing?
Beta, primarily used in the capital asset pricing model (CAPM), is a measure of the volatility–or systematic risk–of a security or portfolio compared to the market as a whole.
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 is beta coefficient?
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. In finance, each of these data points represents an individual stock's returns against those of the market as a whole.
What is beta in finance?
In statistical terms, beta represents the slope of the line through a regression of data points. In finance, each of these data points represents an individual stock's returns against those of the market as a whole. Beta effectively describes the activity of a security's returns as it responds to swings in the market.
How to calculate beta of a security?
A security's beta is calculated by dividing the product of the covariance of the security's returns and the market's returns by the variance of the market's returns over a specified period. The calculation for beta is as follows:
What is beta in stock market?
Stock Beta is one of the statistical tools that quantify the volatility in the prices of a security or stock with reference to the market as a whole or any other benchmark used for comparing the performance of the security. It is actually a component of Capital Asset Pricing Model (CAPM)
What does it mean when the beta of a stock is negative?
The Stock Beta can have three types of values: Beta < 0: If the Beta is negative, then this implies an inverse relationship between the stock and the underlying market or the benchmark in comparison. Both stock and the market or the benchmark will move in the opposite direction. Beta = 0: If the Beta is equal to zero, ...
What does it mean when the beta is 0?
Beta = 0: If the Beta is equal to zero, then this implies that there is no relation between the movement of the returns of the stock and the market or the benchmark, and hence both are too dissimilar to have any common pattern in price movements . Beta > 0: If the Beta is greater than zero, then there is a strong direct relationship between ...
What does it mean when the beta is greater than zero?
Beta > 0: If the Beta is greater than zero, then there is a strong direct relationship between the stock and the underlying market or the benchmark. Both stock and the market or the benchmark will move in the same direction. Some further insight is as follows:
What does a beta of 1 mean?
Beta of 1 implies that the volatility of the stock is exactly the same as that of the underlying market or the index in both qualitative and quantitative terms. Beta of greater than 1 implies that the stock is more volatile than the underlying market or index. A negative Beta is possible but highly unlikely.
Is a negative beta of gold a good thing?
A negative Beta is possible but highly unlikely. Most investors believe that gold and stock based on gold tend to perform better when the market dives. Whereas a Beta of zero is possible in the case of government bonds acting as risk-free securities providing a low yield to the investors.
Is a beta of zero a risk free bond?
Whereas a Beta of zero is possible in the case of government bonds acting as risk-free securities providing a low yield to the investors. And a Beta of greater than zero is the most common scenario that we see in the investment world. Most of the stocks follow this pattern.
What is beta in stock?
Beta is a statistical measure of a stock’s volatility that may in turn be used to determine how volatile a stock is in comparison to the rest of the market. In other words, the stock’s beta value suggests the extent of its volatility and measures the responsiveness of a stock’s price to changes in the market.
How beta is determined in the stock market?
Some stocks are highly volatile, while others are not as much. Simply put, beta is the coefficient of a stock variation that indicates the rate at which the value of security changes in response to market movements.
Beta values of Indian stocks
Beta values are primarily of four types. They are different among securities, as well as respective benchmark index depending on which it is calculated.
Why should you invest in beta stocks?
To gain substantial returns on the portfolio, individuals with a high aptitude for risk can invest in stocks with a beta value higher than 1. Stocks of small-cap and mid-cap companies usually have a beta value higher than 1, owing to their potential for growth.
Merits of beta stocks
Investors rely heavily upon beta value before investing. It is one of the most significant coefficients that help you analyse the unsystematic or market-related risks of a company, thus helping to gauge the overall risk factor associated with respective securities.
Demerits of beta stocks
Beta value cannot comprehend the underlying performance of the stock issuing companies. Therefore, you can run the risk of investing in value-trap securities if you pool your money based only on the beta in the share market.
What does beta mean in stocks?
The beta is the number that tells the investor how that stock acts compared to all other stocks, or at least in comparison to the stocks that comprise a relevant index. Beta measures a stock's volatility, the degree to which its price fluctuates in relation to the overall stock market. In other words, it gives a sense of ...
What does beta mean in investing?
In investing, beta does not refer to fraternities, product testing, or old videocassettes. Beta is a measurement of market risk or volatility. That is, it indicates how much the price of a stock tends to fluctuate up and down compared to other stocks.
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.
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.
What is the beta of cash?
Beta of 0: Basically, cash has a beta of 0. In other words, regardless of which way the market moves, the value of cash remains unchanged (given no inflation). Beta between 0 and 1 : Companies that are less volatile than the market have a beta of less than 1 but more than 0. Many utility companies fall in this range.
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 is the drawback of using beta?
The biggest drawback to using beta to make an investment decision is that beta is a historical measure of a stock's volatility. It can show you the pattern so far but it can't tell you what's going to happen in the future.
What is beta in stock market?
Definition: Beta is a numeric value that measures the fluctuations of a stock to changes in the overall stock market. Description: Beta measures the responsiveness of a stock's price to changes in the overall stock market.
What does a positive beta mean in stocks?
A positive beta value indicates that stocks generally move in the same direction with that of the market and the vice versa. Also see: volatility, CAPM, NSE Nifty, alpha. PREV DEFINITION.
What does 1.3 mean in stock?
For example, if a stock's beta value is 1.3, it means, theoretically this stock is 30% more volatile than the market . Beta calculation is done by regression analysis which shows security's response with that of the market.
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.
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 ...
Why is beta important?
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.
How to calculate beta?
Beta could be calculated by first dividing the security's standard deviation of returns by the benchmark's standard deviation of returns. The resulting value is multiplied by the correlation of the security's returns and the benchmark's returns.
What is variance in stocks?
Variance, on the other hand, refers to how far a stock moves relative to its mean. For example, variance is used in measuring the volatility of an individual stock's price over time. Covariance is used to measure the correlation in price moves of two different stocks.
What does beta mean in stocks?
Beta indicates how volatile a stock's price has been in comparison to the market as a whole. A high alpha is always good. A high beta may be preferred by an investor in growth stocks but shunned by investors who seek steady returns and lower risk. 1:26.
What is beta in investing?
Beta: An Overview. Alpha and beta are two of the key measurements used to evaluate the performance of a stock, a fund, or an investment portfolio. Alpha measures the amount that the investment has returned in comparison to the market index or other broad benchmark that it is compared against. Beta measures the relative volatility of an investment. ...
What is the purpose of beta?
Beta measures the relative volatility of an investment. It is an indication of its relative risk. Alpha and beta are standard calculations that are used to evaluate an investment portfolio’s returns, along with standard deviation, R-squared, and the Sharpe ratio .
What does a beta of 1 mean?
A beta of less than 1 means that the security is less volatile than the market , while a beta greater than 1 indicates that its price is more volatile than the market.
What does it mean when a stock has a beta of 1.5?
If a stock's beta is 1.5, it is considered to be 50% more volatile than the overall market. Like alpha, beta is a historical number.
What is the difference between beta and alpha?
Alpha and beta are two of the key measurements used to evaluate the performance of a stock, a fund, or an investment portfolio. Alpha measures the amount that the investment has returned in comparison to the market index or other broad benchmark that it is compared against. Beta measures the relative volatility of an investment.
Overview
- In finance, the beta (β or beta coefficient) of an investment is a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic factors. The market portfolio of all investable assets has a beta of exactly 1. A beta below 1 can indicate either an investment with lower volatility than the market, or a volatile investment whose price movements are not hig…
Analysis
- The broad equity market has a beta coefficient of 1 and beta coefficients of different stocks are measured with reference to the market beta. A beta coefficient below 1 means that the stock has a systematic risk lower than the market and a beta coefficient greater than 1 shows that the stock has an above-average risk and return.Information about a company's beta can be obtained from …
Definition
- Define Beta Coefficient: Beta coefficient means a financial metric that calculates the relationship between a stock’s price and the volatility of the market.
- Beta measures how much a stock price tends to move in either direction compared to a benchmark. Typically, that benchmark is the broader stock market or S&P 500, but it can also be an industry or an index of companies similar in size. Beta is a measure of volatility, not a measure of risk.
Example
- High β – A company with a β that’s greater than 1 is more volatile than the market. For example, a high-risk technology company with a β of 1.75 would have returned 175% of what the market return in a given period (typically measured weekly).Low β – A company with a β that’s lower than 1 is less volatile than the whole market. As an example, consider an electric utility company wit…
- For example, Apple Inc’s (AAPL) beta is 1.44, meaning its stocks are more volatile and is 44% more likely to respond to a movement in the market. The Coca Cola Company (KO) has a β coefficient of 0.74, meaning its stocks are less volatile and is 26% less likely to respond to a movement in the market.It must be noted that most utilities stocks have a beta of less than 1. O…
- The beta scale works like this. A stock with a beta of 1 has moved in lockstep with its benchmark over the measured period of time. A beta of less than 1 means the stock was less volatile than its benchmark, while a number greater than 1 means it was more volatile, exaggerating the benchmark's moves. Meanwhile, a stock with a negative beta tends to move in the opposite dire…
Investing
- By definition, the market itself has a beta of 1, and individual stocks are ranked according to how much they deviate from the macro market (for simplicity purposes, the S&P 500 Index is sometimes used as a proxy for the market as a whole). A stock whose returns vary more than the market's returns over time can have a beta whose absolute value is greater than 1.0 (whether it i…
Risks
- High-beta stocks are often considered risky, and at times they are. However, investors should understand the difference between risk and beta, because while the risk level of a stock is sometimes reflected in its beta, there's more to the story. Let's take a closer look at what beta is and what purpose high-beta stocks can serve. As an investor, it's critically important that you rea…
Academic Theory
- Academic theory claims that higher-risk investments should have higher returns over the long-term. Wall Street has a saying that "higher return requires higher risk", not that a risky investment will automatically do better. Some things may just be poor investments (e.g., playing roulette). Further, highly rational investors should consider correlated volatility (beta) instead of simple vol…
Choice Of Benchmark
- In the U.S., published betas typically use a stock market index such as the S&P 500 as a benchmark. The S&P 500 is a popular index of U.S. large-cap stocks. Other choices may be an international index such as the MSCI EAFE. The benchmark is often chosen to be similar to the assets chosen by the investor. For example, for a person who owns S&P 500 index funds and go…
Importance
- Beta is important because it measures the risk of an investment that cannot be reduced by diversification. It does not measure the risk of an investment held on a stand-alone basis, but the amount of risk the investment adds to an already-diversified portfolio. In the capital asset pricing model (CAPM), beta risk is the only kind of risk for which investors should receive an expected r…
Philosophy
- Real-world business challenges are not factored into beta, but rather mere market volatility, which is a measure of the market's perception of risk and is short-term in nature.