This step examines how understanding the values for beta can be useful for investment and risk management strategies.
This article considers various values for beta, and what they mean for investment and risk management strategies.
What is a beta?
A beta close to one means that the returns on the company stock tend to have variability similar to the market return.
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. A company stock with beta less than one is called a defensive stock.
Beta is useful for risk management
Can you see how knowing the value of beta could be useful for risk management?
Suppose the wider stock market experiences an upward movement over a period of time. An aggressive stock would be expected to experience a relatively larger positive return than the market. A defensive stock would also experience a positive return, but it would be relatively smaller than the market return.
However, if the market experiences a downward adjustment, an aggressive stock would be expected to experience a relatively larger negative return than the market. A defensive stock would also experience a negative return, but it would be a less negative than the market return.
Estimating beta
There are various methods available to estimate beta. We can collect data on the returns of the company stock, and the returns on the market, and estimate the relationship between them using statistical methods.
Or, we could analyse the company in more detail, and compare the operating and financial performance of the company relative to other companies in the sector in which it operates, and relative to other sectors and the wider economy.
Values for beta are published by various sources. However, it is important to know how the estimates have been obtained before the beta values are used to inform risk management strategies.
Mondelez International and Tesla Inc.
Earlier in the week, we considered the share prices of Mondelez International, the American multinational food, drink and confectionary corporation; and Tesla Inc., the American company manufacturing electric cars and solar panels. Let us consider the beta for these two companies.
Using the statistical method, we have obtained daily data on a broad stock market index, the Standard & Poor’s 500. We calculated the daily return on the index, and estimated the relationship between the daily return on Mondelez stock and the market return, for the period 2010 onwards. Using this method the estimated value of beta for Mondelez is 0.75.
This would suggest Mondelez is a defensive stock.
Published values
Let’s see how this compares to some published values:
- Nasdaq provides an estimated value of beta for Mondelez of 0.72 (as of October 2018).
- Reuters has as an estimate of beta for Mondelez of 0.82.
- finance.yahoo.com quotes a Mondelez beta of 0.55, so it is important to understand the methodology used to obtain estimates.
- What about the beta of Tesla Inc.? Using the statistical method, we obtain an estimate of beta for Tesla of 1.29. This suggests Tesla is an aggressive stock. Is that consistent with your perception of this company?
- Again, Nasdaq quotes a value for Tesla beta of 1.47.
- Reuters quotes a Tesla beta of 1.04.
- In contrast, finance.yahoo.com quotes a beta for Tesla of 0.84.
Mondelez and Tesla provide examples of a defensive stock and an aggressive stock (considering all of the estimates above).
© SOAS University of London
FAQs
Beta is a concept that measures the expected move in a stock relative to movements in the overall market. A beta greater than 1.0 suggests that the stock is more volatile than the broader market, and a beta less than 1.0 indicates a stock with lower volatility.
What does a beta of 0.7 mean? ›
A fund with a beta of 0.7 has experienced gains and losses that are 70% of the benchmark's changes. A beta of 1.3 means the total return is likely to move up or down 30% more than the index. A fund with a 1.0 beta is expected to move in sync with the index."
What does a beta of 1.5 mean? ›
What does a stock beta of 1.5 mean? A stock beta of 1.5 means that a stock's volatility is 1.5 times that of the overall stock market. The price is moving up or down at a higher rate than the S&P 500 has over the past few years.
What does a beta of 2.0 mean? ›
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.
Is 1.3 beta high? ›
High Beta. A beta higher than one shows that a stock's price is more volatile than the market. For example, a beta of 1.3 suggests that the stock is 30% more volatile than the market. Some types of stocks, like those in cyclical industries, have higher betas.
Is 1.2 a high beta? ›
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.
What is a bad beta for a stock? ›
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.
What is a good beta for a stock? ›
For investors who are seeking lower-risk investments, a beta close to 1 may be considered "good." For investors who have a higher tolerance for risk and are seeking higher returns, a beta greater than 1 may be considered "good."
What does a beta of 0.8 indicate? ›
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.
Do you want a high or low beta? ›
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.
Beta testing is an opportunity for real users to use a product in a production environment to uncover any bugs or issues before a general release. Beta testing is the final round of testing before releasing a product to a wide audience.
Which stock has highest beta? ›
High Beta Stocks
| S.No. | Name | CMP Rs. |
|---|
| 1. | Lloyds Metals | 355.30 |
| 2. | Apar Inds. | 3043.30 |
| 3. | Britannia Inds. | 4900.25 |
| 4. | Balaji Amines | 2166.55 |
23 more rowsIf 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.
What is considered a low beta? ›
A stock that has a market value above 1.0 is considered high-beta, whereas a stock with a market value lower than 1.0 is considered as low-beta. The beta, in any market across the world, is 1.0. Investors have to figure out a way to maintain exposure to equities, with the recent volatility in the stock market.
Why is market beta always 1? ›
The beta of market portfolio is always one. Because beta measures the sensitivity of an asset to the movements of the overall market portfolio, and the market portfolio obviously moves precisely with itself, its beta is one.
Is beta 0.7 good? ›
A Beta value of 1.0 indicates that the investment is as volatile as the baseline index. If the Beta value is 1.3, the investment is 30% more unstable than the benchmark. If the Beta is 0.7, that means the stock is 70% less unstable than the index.
What does a beta of 0.75 mean? ›
A beta greater than 1.0 suggests that the stock is more volatile than the broader market, and a beta less than 1.0 indicates a stock with lower volatility.
What does a beta of 0.8 mean? ›
For example, a stock with a beta of 0.8 would be expected to return 80% as much as the overall market. A stock with a beta of 1.2 would move 20% more than the overall market.
