Beta is a measure of a company's common stock price volatility relative to the market. It is calculated as the slope of the 60 month regression line of the percentage price change of the stock relative to the percentage price change of the relevant index (e.g. the FTSE All Share).
According to asset pricing theory, beta represents the type of risk, systematic risk, that cannot be diversified away. 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.
A stock with a Beta of 2 has returns that change, on average, by twice the magnitude of the overall market's returns: when the market's return falls or rises by 3%, the stock's return will fall or rise (respectively) by 6% on average.
When using Beta, there are a number of issues that you need to be aware of: 1. Betas may change through time; 2. Betas may be different depending on the direction of the market; 3. The estimated Beta will be biased if the security does not frequently trade; 4. The Beta is not necessarily a complete measure of risk, 5. The Beta is a measure of co-movement, not volatility. It is possible for a security to have a zero Beta and higher volatility than the market.
Theoretically, high Beta stocks tend to be more volatile and therefore riskier, but provide the potential for higher returns. Some have challenged this idea, claiming that the data show little relation between beta and potential reward.
Beta values are not calculated if less than 40 months of pricing is available. You can read more about our calculation here.
