Beta is a metric that compares a stock's movements relative to the overall market, or a certain stock index. A high-beta stock tends to be more volatile than average, while a low-beta stock tends to be less volatile.
What is beta in stock market?
Beta is a measure of systematic risk. It measures the volatility of the stock compared to the broader markets. A beta of one implies that a stock is as volatile as the market. A beta above one implies that the stock is more volatile than the markets, while a beta below one implies volatility less than the markets.
Is beta a good risk metric for trading?
Granted, for traders looking to buy and sell stocks within short time periods, beta is a fairly good risk metric. However, for investors with long-term horizons, it's less useful.
How do you interpret the beta coefficient of a stock?
A company with a higher beta has greater risk and also greater expected returns. The beta coefficient can be interpreted as follows: β =1 exactly as volatile as the market. β >1 more volatile than the market. β <1>0 less volatile than the market. β =0 uncorrelated to the market. β <0 negatively correlated to the market.
What is a good beta score 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 1.8 mean?
Beta indicates how volatile a stock's price is in comparison to the overall stock market. A beta greater than 1 indicates a stock's price swings more wildly (i.e., more volatile) than the overall market. A beta of less than 1 indicates that a stock's price is less volatile than the overall market.
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.
What does a 0.8 beta 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 β of 1.3 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 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.
Is negative beta good?
In general, high beta means high risk, but also offers the possibility of high returns if the stock turns out to be a good investment. A negative beta coefficient, on the other hand, means the investment moves opposite of market direction.
What is the lowest beta stock?
Low Beta StocksCompanyCurrent PriceBetaTR Tootsie Roll Industries$32.24 -0.1%0.01SMED Sharps Compliance$4.16 -6.3%0.01PFHD Professional$22.93 -0.9%0.01GLBS Globus Maritime$2.37 +1.3%0.0242 more rows
What is considered a low beta portfolio?
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 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).]
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 t…
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. ...
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