Beta

In investment terms, beta measures a stock’s or portfolio’s volatility relative to the overall market, typically represented by an index like the S&P 500. It indicates how much an asset’s price moves in response to market changes.

• Beta = 1: The asset moves in line with the market (e.g., if the market rises 1%, the asset rises 1%).
• Beta > 1: The asset is more volatile (e.g., a beta of 1.5 means it moves 1.5% for a 1% market change).
• Beta < 1: The asset is less volatile (e.g., a beta of 0.5 means it moves 0.5% for a 1% market change).
• Beta = 0: The asset’s price is uncorrelated with the market.
• Negative Beta: The asset moves inversely to the market (e.g., a beta of -1 means it rises 1% when the market falls 1%).

Beta is used to assess systematic risk, helping investors understand an asset’s sensitivity to market movements. High-beta stocks are riskier but may offer higher returns, while low-beta stocks are more stable. It’s a key component in models like the Capital Asset Pricing Model (CAPM) for calculating expected returns.