Glossary
Beta
A measure of how much a stock tends to move with the market; a beta of 1.5 means it has moved about 1.5 times as much on average.
Beta measures how sensitive a stock's or fund's returns have been to the returns of the overall market, usually the S&P 500. A beta of 1.0 means it has tended to move in line with the market; 1.5 means roughly 1.5 times as much in either direction; 0.5 means about half as much. It is the standard gauge of systematic risk, the part of risk that diversification cannot remove.
How it is calculated
Beta comes from a regression of the stock's periodic returns on the market's returns over the same dates, commonly five years of monthly data or one to two years of daily or weekly data.
Reading it correctly
- High volatility does not mean high beta. A gold miner can be very volatile yet have a low beta because it moves independently of stocks.
- Negative betas are rare and usually short-lived.
- Beta is backward-looking. It changes as a business changes, and different providers report different values depending on the period and frequency used.
- It assumes a straight-line relationship. Many stocks fall harder in crashes than their beta implies.
Beta also feeds the capital asset pricing model, where it sets the return investors should expect for bearing market risk, and it is the yardstick against which alpha is measured.