The Beta Coefficient is a means of measuring the volatility of a security
or portfolio of securities in comparison with the market as a whole.
In other words, Beta is the sensitivity of a stock's returns
to the returns on some market index.
Beta is calculated using regressiopn analysis.
A beta of 1 indicates that the security's price will move with the market.
A beta greater than 1 indicates that the security's price will be more volatile than the market.
A beta less than 1 means that it will be less volatile than the market.
Beta values can be roughly characterized as follows:
* b less than 0
Negative beta is possible but not likely.
People thought gold stocks should have negative betas but that hasn't been true.
* b equal to 0
Cash under your mattress, assuming no inflation!
* beta between 0 and 1
Low-volatility investments (e.g., utility stocks)
* b equal to 1
Matching the index.
* b greater than 1
Anything more volatile than the index.
* b much greater than 1
Impossible, because the stock would be expected to go to zero on any market decline.
Most new high-tech stocks have a beta greater than one,
they offer a higher rate of return but they are also very risky.
The Beta is a good indicator of how risky a stock is.
The more risky a stock is, the more its beta moves upward.
A low-beta stock will protect you in a general downturn.
That's how it is supposed to work, anyway.
Unfortunately, past behavior offers no guarantees about the future.
If a company's prospects change for better or worse,
then its beta is likely change, too.
So use the Beta Coefficient as a guide to a stock's tendencies,
not as a crystal ball!
Get In Touch With Us
Send Us Your Questions and/or Comments
Back to the First Page | Back to the Investor Education