What is Stock Beta? - Definition | Meaning | Example (2024)

FAQs

What is Stock Beta? - Definition | Meaning | Example? ›

Beta is a measure of a stock's volatility in relation to the overall market. By definition, the market, such as the S&P 500 Index, has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0.

Beta is a measure of a stock's historical volatility in comparison with that of a market index such as the S&P 500. Stocks with a beta above 1 tend to be more volatile than their index, while stocks with lower betas tend to be less volatile.

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."

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 beta value of 1.5 indicates that the price of the stock is more volatile than the market. In fact, it is assumed to be 50% more volatile than the market. Tech stocks and small caps tend to have high betas.

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.

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.

The level of beta represents the systematic risk of a stock. 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.

Also importantly, negatively correlated securities would be expected to rise when the overall market falls, or vice versa. Interestingly enough, as of late, low-beta stocks have been outperforming the market, offering investors long-term options with a lower risk.

What does a beta of 0 mean? ›

What Is a Zero-Beta Portfolio? A zero-beta portfolio is a portfolio constructed to have zero systematic risk, or in other words, a beta of zero. A zero-beta portfolio would have the same expected return as the risk-free rate.

Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio.

Advantages and Disadvantages of Beta. The advantage of using beta is that it is useful way to gauge an asset's volatility in relation to the overall stock market. The disadvantage of using beta is that it is based on historical data and may not necessarily be an accurate predictor of future volatility.

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.

Any beta less than 1 denotes lower volatility and higher than 1 denotes more volatility compared to the benchmark index. For example, if your mutual fund portfolio XYZ has a beta of 0.70, it denotes lower volatility. This means that for every rise or fall of 1 in the market, the value of XYZ may rise or fall by 0.70.

If a stock has a beta of 1.2, it might be considered 20 percent riskier than the benchmark and therefore should compensate investors with a higher expected return. If the index returned 10 percent, the stock should return 12 percent.

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.

What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you.

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.

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.

What is acceptable beta risk? ›

Beta risk contrasts with alpha risk, which measures the probability that a null hypothesis is rejected when it is actually true. Increasing the sample size used in a statistical test can reduce beta risk. An acceptable level of beta risk is 10%; beyond that, the sample size should be increased.

This is because Amazon.com's beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market.

Beta is commonly set at 0.2, but may be set by the researchers to be smaller. Consequently, power may be as low as 0.8, but may be higher. Powers lower than 0.8, while not impossible, would typically be considered too low for most areas of research.

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%.

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.

If a security's expected return versus its beta is plotted above the security market line, it is considered undervalued, given the risk-return tradeoff.

The sectors that ranked lowest in beta are about what we'd expect. Consumer staples (things people buy in good times and bad), as well as utilities (the light and power we take for granted in the developed world), led the way with betas of 0.57 each.

Should you invest in high beta stocks? ›

High-beta stocks can be great investments in bull markets since they are expected to outperform the S&P 500 but require a great deal of active management because of their market sensitivity. These are highly volatile and risky investments in isolation. In a bear market reversal, stocks can be expected to lose the most.

Beta (β) is a measure of the volatility—or systematic risk—of a security or portfolio compared to the market as a whole (usually the S&P 500). Stocks with betas higher than 1.0 can be interpreted as more volatile than the S&P 500.

Yes, beta can be negative. To see how and why, consider what beta measures: the risk added by an investment to a well diversified portfolio. By that definition, any investment that when added to a portfolio, makes the overall risk of the portfolio go down, has a negative beta.

Beta forms the core of the CAPM, which is used to calculate the cost of equity, which is an important input for valuation of a stock. Higher the Beta higher is the compensation that investors will expect from the stock and vice versa.

34 One of the reasons Amazon's P/E is so much higher than Apple's is that its efforts to expand aggressively on a wide scale have helped keep earnings somewhat suppressed and the P/E ratio high. The P/E ratio should be used with a variety of other analysis tools to analyze a stock.

One major reason why Tesla is valued so much higher than its peers is growth. The electric-car maker increased its sales by 37 percent last year. Wall Street analysts anticipate another 26 percent of upside this year.

P/E ratio as of June 2023 (TTM): 65.1

According to Tesla's latest financial reports and stock price the company's current price-to-earnings ratio (TTM) is 65.0576. At the end of 2021 the company had a P/E ratio of 190.

The goal of pilot testing is typically to gauge the performance of a product or app. Conversely, beta testing is open to a much wider group of end users. Coming after pilot testing, beta testers conduct their work in a production environment to gauge the end users' broader responses to the product.

1) The biggest advantage of a high beta stock is high returns. When markets are on a high, high beta stocks perform better than the broader markets also. Even a small gain in stock markets can lead to a significant rally in high beta stocks thereby increasing investor returns.

What happens if beta is less than 1? ›

Beta Value Less Than One

A beta value below 1.0 means that a security is less volatile than the market, making it a less risky addition to a portfolio. For instance, utility stocks often have low betas because they have a more stable value and move more slowly than market averages.

Anyone who follows the stock market knows that some days market indexes and stock prices move up and other days they move down. This is called volatility. The more dramatic the swings, the higher the level of volatility—and potential risk.

A beta above 1 means a stock is more volatile than the overall market. A beta below 1 means a stock is less volatile than the overall market. The S&P 500, Dow Jones Industrial Average, and Nasdaq 100 are frequently used beta measures.

Examples of Beta

As an example, consider an electric utility company with a β of 0.45, which would have returned only 45% of what the market returned in a given period.

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.

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.

Definition of Beta (5 Year)

Beta measures the risk or volatility of a company's share price in comparison to the market as a whole. For example, a company with a beta of 1.1 will theoretically see its stock price increase by 1.1% for every 1% increase in the market.

Smart Beta strategies primarily focus on factors that have historically been persistent drivers of returns across equities and other asset classes. Whether they use a multifactor or a single factor approach, Smart Beta strategies give investors the potential to fine tune their exposures and reduce unintended risks.

High-beta stocks tend to be riskier but provide the potential for higher returns. Low-beta stocks pose less risk but typically yield lower returns.

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.

Is Tesla a high beta stock? ›

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 1.78 .

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.

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.