In conjunction with stock valuation ratios like the price-to-earnings ratio and the price-to-earnings-growth ratio, a stock's beta can help investors build a diversified portfolio. Beta is a measure of a stock's volatility, and adding low-beta stocks to a portfolio can a be a great way to provide diversification.

IN PICTURES: benchmark for beta, investors can determine how a stock may perform in relation to a broad index. If a stock has a beta of 1, it is expected to move up and down in tandem with the benchmark. A stock with a beta of 1.10 is expected to rise or fall 10% more than the benchmark. Conversely, a stock with a beta of 0.80 would be expected to move up or down only 80% as much as the benchmark. In short, the higher the beta, the higher the stock's volatility.

And, by using beta to measure volatility, you can better choose securities that meet your criteria for risk. Investors who are very risk averse should put their money into investments with low betas such as blue chip stocks and Treasury bills. Those who are willing to take on more risk may want to invest in stocks with higher betas.

Here's a list of five low-beta stocks from the Dow Jones Industrial Average (DJIA):

Company Beta Market Cap (Billions)
The Home Depot Inc. (NYSE:HD) 0.77 57.03B
Verizon Communications Inc. (NYSE:VZ) 0.60 97.75B
The Coca-Cola Company(NYSE:KO) 0.59 148.80B
Prizer Inc. (NYSE:PFE) 0.66 137.85B
3M Co.(NYSE:MMM) 0.84 61.18B

Final Thoughts
By adding low beta stocks from the DJIA, investor gain exposure to a cross-section of industries including consumer goods, retail, communications, drug manufacturing and industrial materials. The diversity is a great start, but investors should always remember to use beta as a guide to adding diversity and not as a guarantee of a stock's future price volatility. (To learn the basics of beta, read Beta: Know The Risk.) Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

You May Also Like

COMPANIES IN THIS ARTICLE
Related Analysis
  1. Stock Analysis

    Should You Short These Debt-Laden Stocks?

  2. Investing Basics

    Are Bears About to Burst the Biotech Bubble?

  3. Chart Advisor

    Stocks Breaking to Downside - Time to Sell?

  4. Professionals

    The Coming Stock Market Decline: What to Expect

  5. Stock Analysis

    Why Marvin Ellison Is an Ideal CEO for J.C. Penney

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!