When analyzing a stock, what does "beta (three year monthly)" mean?

Is this information valuable when choosing between different funds in the same category?

Stocks
Answers
Sort By:
Most Helpful
2 weeks ago

Danford, Dan

Saint Joseph - Kansas City, MO

Beta is a measure of volatility. It is essentially a comparison of one investment to a standardized index. If the number is greater than 1, then the investment was more volatile than the index. If it is less than 1, then it has been less volatile than the index. If it was 1.10, then it was 10% more volatile than the index, at .91 is was (roughly) 10% less than the index. It's important to know several things: what index is being used? If you compare the movements of a single stock against the S&P500 index, the Beta math might be correct, but how good is a comparison of one stock to 500 stocks? Similarly, it wouldn't make much sense to compare a bond mutual fund volatility to an S&P500 index ... they are vastly different investments. Make sure you understand the index used and calculate a different Beta using a different index if that makes more sense. Another issue is the time frame. A "three year monthly" Beta compares just three years of data. That same calculation could be done with five years or ten years, and might be more or less accurate for understanding. You didn't ask this, but volatility is the usual measure of risk in portfolio science. If an investment is more risky (more volatile), investors expect higher returns. Less risky investments generally provide lower returns. Beta is also used to measure portfolio returns with a general rule that a 10 percent higher Beta (volatility) should yield a 10 percent higher return ... Alpha is the statistic (+ or -) that compares actual returns using Beta.

2 weeks ago
2 weeks ago
2 weeks ago
2 weeks ago