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|
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!