What is a stock's beta?

A stock's beta is a measure of its volatility in relation to the overall market. It is a metric used in finance to assess how a particular stock's price movements are correlated with the price movements of a benchmark index, typically the overall stock market or a specific market index like the S&P 500. Beta is a key component of the Capital Asset Pricing Model (CAPM), which is used to determine the expected return on an investment.

Here's how beta works:

1. A beta of 1: If a stock has a beta of 1, it is expected to move in line with the market. If the market goes up by 1%, the stock is expected to go up by 1%, and if the market goes down by 1%, the stock is expected to go down by 1%. This means the stock is as volatile as the overall market.

2. A beta greater than 1 (e.g., 1.5): If a stock has a beta greater than 1, it is considered more volatile than the market. For example, if the stock has a beta of 1.5, it is expected to be 50% more volatile than the market. So if the market goes up by 1%, the stock is expected to go up by 1.5%, and if the market goes down by 1%, the stock is expected to go down by 1.5%.

3. A beta less than 1 (e.g., 0.8): If a stock has a beta less than 1, it is considered less volatile than the market. For example, if the stock has a beta of 0.8, it is expected to be 20% less volatile than the market. So if the market goes up by 1%, the stock is expected to go up by 0.8%, and if the market goes down by 1%, the stock is expected to go down by 0.8%.

4. A beta of 0: A beta of 0 means that the stock's price movements are not correlated with the market at all. This is relatively rare and typically indicates that the stock's returns are independent of the broader market.

Investors and analysts use beta to assess a stock's risk and determine how it might fit into a diversified portfolio. A stock with a high beta is generally riskier, as its price is more sensitive to market fluctuations. Conversely, a stock with a low beta is typically considered less risky, as it is less affected by market movements. However, it's essential to remember that beta is just one of many factors to consider when evaluating an investment, and it should be used in conjunction with other metrics and analysis.