Beta quantifies how much a stock’s price is expected to fluctuate compared to a benchmark index, typically the S&P 500. A beta greater than 1 suggests that the stock is more volatile than the market, meaning it tends to experience larger price swings both upward and downward. Conversely, a beta less than 1 indicates that the stock is less volatile and moves more steadily than the market. Investors use beta to assess the risk associated with a stock and to make informed decisions about portfolio diversification. High beta stocks can offer greater potential returns but come with increased risk, while low beta stocks are generally viewed as safer investments.
Beta Example
For example, if a stock has a beta of 2, it means that for every 1% change in the market, the stock’s price is expected to change by 2%. So, if the market rises by 10%, the stock would likely increase by 20%. Conversely, if the market falls by 10%, the stock would likely decrease by 20%.