Also referred to as “the Beta coefficient,” Beta is a statistical term used by money managers operating in the tradable equities securities market. Essentially, Beta is a measure of the volatility, or systematic risk, of a particular security or a portfolio in comparison to the market as a whole. Beta typically is used as a component of the capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market returns. Beta is calculated using regression analysis in an attempt to quantify the tendency of a security’s returns to respond to swings in the market. A beta of 1 indicates that the security’s price will move in lock step with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market. For example, if a stock’s beta is 1.2, it’s theoretically 20% more volatile than the market. Utilities stocks typically have a beta of less than 1. Conversely, the majority of high-tech, typically Nasdaq-based stocks have a beta of greater than 1. Stocks with a beat of greater than 1 are believed to offer the possibility of a higher rate of return, but also require the investor to assume higher risk.
« Back to Glossary Index