Beta Definition

Beta

A measurement of the volatility of the stock (or other investment or portfolio) compared to the broad market.  The beta can be used to measure how much a stock can be expected to move relative to the overall market.  The beta for the broad market is 1, so a stock with a beta of 1 is expected to move at the same rate as the overall market.  A stock with a beta greater than 1 is expected to be more volatile, or move faster, than the overall market while a stock with a beta of less than 1 is expected to be less volatile, or move slower, than the overall market.

For example, a stock with a beta of 1.6 would be expected, in theory, to move 60% faster than the broad market, so if the market were to go up 10% the stock would be expected to increase 16% and if the market were to go down 10% the stock would be expected to decrease 16% while a stock with a beta of .5 would be expected, in theory, to move 50% slower than the broad market, so if the market were to go up 10% the stock would be expected to only increase 5% and if the market were to go down 10% the stock would be expected to only decrease 5%.  While the beta can be used to help identify the risk profile of an investment, it should be noted than an investor’s individual goals and risk tolerance will determine what kind of beta they are looking for in their investments or portfolios.