High Beta Index (2024)

FAQs

Is it good to have a high beta coefficient? ›

A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks are supposed to be riskier but provide higher return potential; low-beta stocks pose less risk but also lower returns.

A higher beta generally indicates that a stock is more volatile than the market, and therefore carries a greater level of risk. This can also indicate that the stock has the potential for higher returns.

The beta of a stock or portfolio will tell you how sensitive your holdings are to systematic risk, where the broad market itself always has a beta of 1.0. High betas indicate greater sensitivity to systematic risk, which can lead to more volatile price swings in your portfolio, but which can be hedged somewhat.

If beta is greater than one, the returns on the company stock are more volatile than the market return. A company stock with beta greater than one is called an aggressive stock. If beta is less than one, the returns on the company stock are less volatile than the market return.

Stocks with a beta above 1 tend to be more volatile than their index, while stocks with lower betas tend to be less volatile. High-beta stocks tend to increase a portfolio's overall volatility and low-beta stocks tend to decrease it. However, beta is a backward-looking metric which only measures one kind of risk.

The t-test assesses whether the beta coefficient is significantly different from zero. If the beta coefficient is not statistically significant (i.e., the t-value is not significant), the variable does not significantly predict the outcome.

Many investors prefer a high alpha (or returns in excess of the benchmark's returns) alongside a low beta (implying that their investment is less volatile than the benchmark). This infers returns above market returns without the high volatility risk of large upward or downward swings in performance.

A beta that is greater than 1.0 indicates that the security's price is theoretically more volatile than the market. For example, if a stock's beta is 1.2, it is assumed to be 20% more volatile than the market. Technology stocks and small cap stocks tend to have higher betas than the market benchmark.

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).]

A stock that is more volatile than the market over time has a beta greater than 1.0 and is a high-beta stock. High-beta stocks may be riskier, but provide the potential for higher returns. If a stock moves less than the overall market's volatility, that stock is a low-beta stock with a measurement of less than 1.0.

What does beta tell you about risk? ›

Beta measures a stock's volatility, the degree to which its price fluctuates in relation to the overall stock market. In other words, it gives a sense of the stock's risk compared to that of the greater market's. Beta is used also to compare a stock's market risk to that of other stocks.

What Is a Good Beta Value for a Stock? Whether or not a stock has a “good†beta value depends on what you are looking for in a stock. If you're risk averse, then look for a stock with a beta value at or below 1.0. If you're looking for something more exciting, then consider a stock with a value of above 2.0.

Answer: For the normal distribution, β2 = 3; cases for which β2 > 3 indicate distributions that are more outlier-prone (i.e., have heavier tails) than the normal (Gaussian) distribution, while those for which β2 < 3 indicate distributions that are less outlier-prone than the normal.

For example, a stock with a beta value of 0.8 means that stock is only 80% as volatile with its price swings compared with the overall market index. Another way to look at this is that the stock is 20% less volatile than the overall stock market.

High And Low Beta Value

A low beta value typically means that the stock is considered less risky, but will likely offer low returns as well. The higher the beta value, the more risk you take as an investor, but the higher your chances are of a big return as well.

A negative beta describes an investment that tends to increase in price when the general market price falls and vice versa. Securities Lending is an example of an investment strategy which has a negative beta. This is because, as the returns available from the market fall, lending rates will generally rise.

Key Takeaways. Both alpha and beta are historical measures of past performances. A high alpha is always good. A high beta may be preferred by an investor in growth stocks but shunned by investors who seek steady returns and lower risk.

So what is beta? Beta is the probability that we would accept the null hypothesis even if the alternative hypothesis is actually true. In our case, it is the probability that we misidentify a value as being part of distribution A when it is really part of distribution B.

The Beta coefficient is a measure of sensitivity or correlation of a security or an investment portfolio to movements in the overall market.

Does higher beta mean higher correlation? ›

Beta equals the standard deviation of the stock times the correlation between the stock and the market divided but the standard deviation of the market. So as correlation increases, all else held constant, the beta will increase and vice versa.

In general, a higher alpha is more desirable for investors since it means greater return on investment. A lower alpha indicates the fund earned below the average expected for its risk level.

Smart beta strategies seek to enhance returns, improve diversification, and reduce risk by investing in customized indexes or ETFs based on one or more predetermined "factors." They aim to outperform, or have less risk than, traditional capitalization-weighted benchmarks but typically have lower expenses than a ...

For fixed n and values of the null and hypothesized mean, the value of beta increases and the power decreases as the value of alpha is decreased. For fixed alpha and values of the null and hypothesized mean, the value of beta decreases and the power increases as the sample size n is increased.

The beta of a stock measures the volatility of that stock in relation to the market. A beta of 1 means that the stock moves exactly with the market. A beta of 2 means that the stock moves twice as much as the market. A beta of 0 means that the stock does not move with the market.

Low Beta. A beta lower than one suggests that a stock is less risky than the market. A beta of . 5 suggests that the stock is 50% less volatile than the market. Adding this type of stock to a portfolio lowers the overall risk but has a similar effect on potential return.

A fund can also have a beta that is lower than the benchmark index. In that case, if the fund's beta is 0.9, an investor can expect the fund to perform 10% worse than the index in up markets, and 10% better in down markets. For example, if the index gains 10%, the fund would be expected to gain 9%.

Remember, a high alpha is always good. Beta, on the other hand, measures the volatility (or risk) of an investment. It is an indication of Tesla Inc stock's relative risk over its benchmark. Tesla Inc has a beta of 1.53 .

The three types of risk and beta are systematic risk, unsystematic risk, and financial risk.

Amazon Inc has a beta of 0.50 .

Why buy low beta stocks? ›

The lower the Beta value, the less volatility the stock or portfolio should exhibit against the benchmark. This is beneficial for investors for obvious reasons, particularly those that are close to or already in retirement, as drawdowns should be relatively limited against the benchmark.

Theoretically, the beta value of a benchmark index is considered to be 1. The risk factor of securities is evaluated around this number, wherein a stock having a beta coefficient higher than 1 is deemed to be a risky investment venture.

A negative beta means that an investment moves in the opposite direction as the overall stock market. For example, Johnson & Johnson has a beta of 0.7, meaning that it is less volatile than the overall market, while Amazon.com has a beta of 1.6, indicating that investors should expect higher volatility.

High β – A company with a β that's greater than 1 is more volatile than the market. For example, a high-risk technology company with a β of 1.75 would have returned 175% of what the market returned in a given period (typically measured weekly).

The beta phase is focused on reducing impacts on users and may include usability testing. After beta testing, the software may go through one or more release candidate phases, in which it is refined and tested further, before the final version is released.

Stock Screener Stock Ideas Extreme Volatility. High Beta Stocks (2023) Stocks with betas greater than 2.0, indicating abnormally large price fluctuations.

Beta weights usually range in absolute value from 0 to 1. Values larger than 1, while possible, are not conceptually meaningful and may indicate the presence of colinearity among the predictors.

For example, if beta risk is 0.05, there is a 5% likelihood of inaccuracy. Beta risk is sometimes called "beta error" and is often paired with "alpha risk," also known as a Type I error.

On the other hand, a stock with a beta of . 85 has historically been less volatile than the underlying index. “Growth stocks” generally have a higher beta (are more volatile) than “value stocks”—those of larger, more established companies. Higher beta comes with higher risk but the potential for higher returns.

Is a higher beta better or worse? ›

A beta above 1.0 means the stock will have greater volatility than the market, and a beta less than 1.0 indicates lower volatility. Volatility is usually an indicator of risk, and higher betas mean higher risk, while lower betas mean lower risk.

For a coefficient β, effect sizes between 0.10–0.29 are said to be only small, effect sizes between 0.30–0.49 are medium, and effect sizes of 0.50 or greater are large [24,25].

The parameter β (the regression coefficient) signifies the amount by which change in x must be multiplied to give the corresponding average change in y, or the amount y changes for a unit increase in x. In this way it represents the degree to which the line slopes upwards or downwards.

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. A beta of 1 indicates the stock moves identically to the overall market.

A positive beta coefficient means that an increase in the predictor variable is associated with an increase in the dependent variable, while a negative beta coefficient means that an increase in the predictor variable is associated with a decrease in the dependent variable.

The linear regression coefficient β₁ associated with a predictor X is the expected difference in the outcome Y when comparing 2 groups that differ by 1 unit in X. Another common interpretation of β₁ is: β₁ is the expected change in the outcome Y per unit change in X.

The lower the Beta value, the less volatility the stock or portfolio should exhibit against the benchmark. This is beneficial for investors for obvious reasons, particularly those that are close to or already in retirement, as drawdowns should be relatively limited against the benchmark.

The beta coefficient represents the estimated average change in standard deviation units. So a beta coefficient of 0.5 means that every time the independent variable changes by one standard deviation, the estimated outcome variable changes by half a standard deviation, on average.