How does beta measure a stock's market risk?

Modified on Wed, 20 Jun 2018 at 09:50 AM

Beta is a statistical measure of the volatility of a stock versus the overall market. It's generally used as both a measure of systematic risk and a performance measure. The market is described as having a beta of 1. The beta for a stock describes how much the stock’s price moves in relation to the market. If a stock has a beta above 1, it's more volatile than the overall market. As an example, if an asset has a beta of 1.3, it's theoretically 30% more volatile than the market. Stocks generally have a positive beta since they are correlated to the market.

If the beta is below 1, the stock either has lower volatility than the market or it's a volatile asset whose price movements are not highly correlated with the overall market. The price of Treasury bills (T-bills) has a beta lower than 1 because it doesn't move very much in relation to the overall market. Many consider stocks in the utility sector to have betas less than 1 since they're not very volatile. Gold, on the other hand, is quite volatile but has at times had a tendency to move inversely to the market. Lower beta stocks with less volatility do not carry as much risk, but generally provide less opportunity for a higher return.


Source : Investopedia


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