Beta

Loading the player...

DEFINITION of 'Beta'

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns.

Also known as "beta coefficient."

BREAKING DOWN 'Beta'

Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.

Many utilities stocks have a beta of less than 1. Conversely, most high-tech, Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk.

Test your Beta knowledge and read more here: Beta: Know the Risk and Calculating Beta: Portfolio Math for the Average Investor

RELATED TERMS
  1. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  2. Alpha

    Alpha is used in finance to represent two things: 1. a measure ...
  3. Implied Volatility - IV

    The estimated volatility of a security's price.
  4. Weighted Average Cost Of Capital ...

    Weighted average cost of capital (WACC) is a calculation of a ...
  5. Volatility Smile

    A u-shaped pattern that develops when an option’s implied volatility ...
  6. CBOE Nasdaq Volatility Index - ...

    A measure of market expectations of 30-day volatility for the ...
Related Articles
  1. Mutual Funds & ETFs

    Top 5 Wellington Funds for Retirement Diversification in 2016

    Discover the top five Wellington Management funds for retirement diversification in 2016, with a summary and performance details of each fund.
  2. Stock Analysis

    3 Predictions for Amazon in 2016 (AMZN)

    Learn the top three predictions for Amazon in 2016 as the company comes off an exceptional year in terms of revenue and expands into new markets.
  3. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  4. Mutual Funds & ETFs

    The Top 5 Buffalo Funds for Retirement Diversification in 2016

    Discover the top five Buffalo Funds for retirement diversification in 2016, with a summary of each fund, including manager and performance information.
  5. Stock Analysis

    The Top 5 Large-Cap Oil Stocks for 2016 (SLB, CVX)

    Read about large-cap oil companies that could recover in 2016. Learn about why oil prices fell so dramatically during 2014 and 2015.
  6. Mutual Funds & ETFs

    The Top 5 Alternative Energy Equity Mutual Funds for 2016 (FSLEX, GAAEX)

    Explore detailed analyses of the top five alternative energy equity mutual funds for 2016, and learn why they may be poised to rise over the long run.
  7. Mutual Funds & ETFs

    IWM: iShares Russell 2000 Index ETF

    Find out more about the iShares Russell 2000 exchange-traded fund, or ETF, the characteristics of this ETF and its suitability for investing.
  8. Mutual Funds & ETFs

    OEF: iShares S&P 100 ETF

    Discover how the iShares S&P 100 offers an opportunity for investors to gain exposure to mega- and large-cap domestic company stocks.
  9. Mutual Funds & ETFs

    MYY: ProShares Short MidCap400 ETF

    Discover the benefits and drawbacks of the ProShares Short MidCap400 ETF, and learn which investors are best suited for the fund's investment strategy.
  10. Mutual Funds & ETFs

    VBR: Vanguard Small-Cap Value ETF

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
RELATED FAQS
  1. How can I hedge my portfolio to protect from a decline in the food and beverage sector?

    The food and beverage sector exhibits greater volatility than the broader market and tends to suffer larger-than-average ... Read Full Answer >>
  2. How attractive is the food and beverage sector for a growth investor?

    The food and beverage sector is attractive for a growth investor. The sector's high degree of volatility means it tends to ... Read Full Answer >>
  3. How attractive is the retail sector for a growth investor?

    Retail is an attractive sector for a growth investor due to its propensity for turning in bigger-than-average gains when ... Read Full Answer >>
  4. What techniques are most useful for hedging exposure to the insurance sector?

    Investing style determines the best hedging techniques for the insurance sector. This sector comprises three segments, two ... Read Full Answer >>
  5. What is the formula for calculating the capital asset pricing model (CAPM) in Excel?

    The capital asset pricing model (CAPM) measures the amount of an asset's expected return given the risk-free rate, the beta ... Read Full Answer >>
  6. What percentage of a diversified portfolio should be exposed to the retail sector?

    Diversification is a portfolio management technique that shields an investor's portfolio from the effects of a crash within ... Read Full Answer >>
  7. Why is the utilities sector popular among value investors?

    The utilities sector is popular among value investors due to the dividends paid by utility companies as well as the traditionally ... Read Full Answer >>
  8. What techniques are most useful for hedging exposure to the utilities sector?

    Utilities is one of the most stable sectors in the market. As such, its primary appeal to investors is its resistance to ... Read Full Answer >>
  9. When phase of the economic cycle tends to be strongest for companies in the retail ...

    The economic cycle has four phases. The expansionary phase occurs when the economy is growing. During this phase, cyclical ... Read Full Answer >>
  10. How does the risk of investing in the telecommunications sector compare to the broader ...

    The telecommunications sector comprises three segments, all of which present greater risk to investors than the broader market. ... Read Full Answer >>
  11. What percentage of a diversified portfolio should be exposed to the utilities sector?

    Diversification protects an investor's portfolio from a sudden decline in a single company or sector. This portfolio management ... Read Full Answer >>
  12. What percentage of a diversified portfolio should be invested in the telecommunications ...

    While ideal portfolio structure varies wildly based on factors such as investing style and risk tolerance, the average investor ... Read Full Answer >>
  13. How does the risk of investing in the retail sector compare to the broader market?

    The retail sector is divided into seven segments, all of which confer greater risk than the broader market. Retail securities ... Read Full Answer >>
  14. Which type of retailers tend to perform best during weak periods in the economy?

    Retail is a broad investment sector comprising many different market segments, such as automotive, building supply, grocery ... Read Full Answer >>
  15. Is the telecommunications sector better suited for active or passive investment?

    The telecommunications sector's high volatility and uncertain future make it better suited for active investment than for ... Read Full Answer >>
  16. What is the formula for calculating beta?

    Beta is a measure used in fundamental analysis to determine the volatility of an asset or portfolio in relation to the overall ... Read Full Answer >>
  17. What are the differences between delta hedging and beta hedging?

    Hedging is used to reduce the risk of adverse price movements in an asset class by taking an offsetting position in a related ... Read Full Answer >>
  18. How does the risk of investing in the real estate sector compare to the broader market?

    While the risk of investing in the real estate sector varies by segment, this sector generally carries greater risk than ... Read Full Answer >>
  19. Is the drugs sector better suited for active or passive investment?

    Active management and passive management represent two vastly different approaches to investing. Active investors keep their ... Read Full Answer >>
  20. How does the risk of investing in the aerospace sector compare to the broader market?

    Investing in the aerospace sector is riskier than investing in the broader market. The most accurate measure of sector volatility, ... Read Full Answer >>
  21. How does my insurance company determine what premiums I have to pay for coverage?

    Investors can use a few basic concepts from quantitative analysis, such as standard deviation and beta, to evaluate possible ... Read Full Answer >>
  22. How can a country's debt crisis affect economies around the world?

    Diversification is a portfolio management technique designed to limit exposure to a particular company or sector. Diversifying ... Read Full Answer >>
  23. What options strategies are best suited for investing in the chemicals sector?

    The best option strategy for investing in the chemicals sector depends on which segment is being utilized. The chemicals ... Read Full Answer >>
  24. Which stage of the economic cycle is most favorable for the chemicals sector?

    The expansionary stage of the economic cycle is most favorable for the chemicals sector. Each of the chemical sector's separate ... Read Full Answer >>
  25. Why are growth investors attracted to the chemicals sector?

    The chemicals sector attracts growth investors because two of its three segments beat the broader market when the market ... Read Full Answer >>
  26. How can an investor profit from a fall in the chemicals sector?

    An investor can profit from a fall in the chemicals sector by short selling chemical stocks and exchange-traded funds (ETFs), ... Read Full Answer >>
  27. Why would growth investors be attracted to the electronics sector?

    Growth investors gravitate toward the electronics sector because its higher-than-average volatility, particularly in the ... Read Full Answer >>
  28. What options strategies are commonly used for investing in the electronics sector?

    The long straddle and long strangle option strategies take advantage of the electronic sector's cyclical nature. Both strategies ... Read Full Answer >>
  29. Why would a growth investor purchase shares of companies in the drug sector?

    The drug sector – particularly its newer, more high-tech biotechnology segment – offers stronger returns than the broader ... Read Full Answer >>
  30. What factors are the primary drivers of share prices in the internet sector?

    Economic conditions such as interest rates, unemployment and wage growth drive share prices in the Internet sector. This ... Read Full Answer >>
  31. How much of a diversified portfolio should be invested in the chemicals sector?

    The chemicals sector varies in volatility by segment, but overall, it tracks fairly closely with the broader market. Therefore, ... Read Full Answer >>
  32. How does the risk of investing in the chemicals sector compare to the broader market?

    The risk of investing in the chemicals sector varies between its three segments, but overall, the sector presents roughly ... Read Full Answer >>
  33. What techniques can be used to hedge exposure to the chemicals sector?

    An investor can hedge exposure to the chemicals sector in two ways. Because the sector is cyclical, an investor can allocate ... Read Full Answer >>
  34. How accurate is the equity risk premium in evaluating a stock?

    The equity risk premium can provide some guidance to investors in evaluating a stock, but it attempts to forecast the future ... Read Full Answer >>
  35. How much of a diversified portfolio should be invested in the electronics sector?

    The electronics sector tracks closely with the broader market, making it a cyclical sector with average volatility. Electronics ... Read Full Answer >>
  36. How does the risk of investing in the electronics sector compare to the broader market?

    The risk of investing in the electronics sector closely approximates the risk of investing in the broader market. The electronics ... Read Full Answer >>
  37. What techniques can be used for hedging exposure to the electronics sector?

    Hedging exposure to the electronics sector offers an investor a way to insulate his portfolio from losses during periods ... Read Full Answer >>
  38. How can an investor profit from the cyclical nature of the electronics sector?

    An investor can profit from the cyclical nature of the electronics sector in two ways. He can employ sector rotation, shifting ... Read Full Answer >>
  39. What stage of the economic cycle is usually the best for an investor to enter the ...

    The best time during the economic cycle for an investor to enter the electronics sector is when he has confidently identified ... Read Full Answer >>
  40. How does market risk differ from specific risk?

    Market risk and specific risk are two different forms of risk that affect assets. All investment assets can be separated ... Read Full Answer >>
  41. What options strategies are best suited for investing in the banking sector?

    The covered call option strategy allows investors to profit from the banking sector's stability and its track record for ... Read Full Answer >>
  42. What is the correlation between equity risk premium and risk?

    The equity risk premium refers to the amount of additional return an investor can obtain from investing in an asset over ... Read Full Answer >>
  43. What techniques are most useful for hedging exposure to the banking sector?

    The banking sector moves in the same direction as the broader market, but its volatility is much lower. The sector's stability ... Read Full Answer >>
  44. During what stage of the economic cycle should I invest in the drugs sector?

    Invest in the drugs sector during the expansionary stage of the economic cycle, when the broader market is rising. The absolute ... Read Full Answer >>
  45. What options strategies are best suited for investing in the aerospace sector?

    The best options strategies for investing in the aerospace sector exploit the sector's volatility and propensity for big ... Read Full Answer >>
  46. What options strategies are best suited for investing in the Internet sector?

    The long straddle and long strangle options strategies enable investors to capitalize on the Internet sector's volatility. ... Read Full Answer >>
  47. What percentage of a diversified portfolio should be exposed to the banking sector?

    The turmoil of the late 2000s notwithstanding, the banking sector has historically been one of the most stable and least ... Read Full Answer >>
  48. What are some common measures of risk used in risk management?

    Risk management is a crucial process used to make investment decisions. The process involves identifying the amount of risk ... Read Full Answer >>
  49. How is the Capital Asset Pricing Model (CAPM) represented in the Security Market ...

    The capital asset pricing model (CAPM) is a measure that describes the relationship between the systematic risk of a security ... Read Full Answer >>
  50. What techniques are most useful for hedging exposure to the drugs sector?

    Useful techniques for hedging exposure to the drugs sector include investing in stable, non-cyclical sectors that do not ... Read Full Answer >>
Hot Definitions
  1. Short Selling

    Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is ...
  2. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  3. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  4. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  5. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  6. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center