Stock Beta with examples

Comment: Shouldn't be but I've often been confused by this. Helpful articles:

What does Beta mean


A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns.

Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.

Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk.

Beta (finance)


By definition, the market itself has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the macro market (for simplicity purposes, the S&P 500 is usually used as a proxy for the market as a whole). A stock whose returns vary more than the market's returns over time can have a beta whose absolute value is greater than 1.0 (whether it is, in fact, greater than 1.0 will depend on the correlation of the stock's returns and the market's returns). A stock whose returns vary less than the market's returns has a beta with an absolute value less than 1.0.

A stock with a beta of 2 has returns that change, on average, by twice the magnitude of the overall market's returns; when the market's return falls or rises by 3%, the stock's return will fall or rise (respectively) by 6% on average. (However, because beta also depends on the correlation of returns, there can be considerable variance about that average; the higher the correlation, the less variance; the lower the correlation, the higher the variance.) Beta can also be negative, meaning the stock's returns tend to move in the opposite direction of the market's returns. A stock with a beta of -3 would see its return decline 9% (on average) when the market's return goes up 3%, and would see its return climb 9% (on average) if the market's return falls by 3%.

Higher-beta stocks tend to be more volatile and therefore riskier, but provide the potential for higher returns. Lower-beta stocks pose less risk but generally offer lower returns.

All of my investments have relatively low betas. Can you think of a stock with a high Beta? Or a negative Beta?


  1. More on stock beta:

    Is Textron a Stock for the Long Term?

    One of the best measurements of volatility is called beta, which measures the impact that the movement of the stock market will have on a particular stock. For instance, a beta of 1.0 signifies that Textron will move in tandem with the market, a beta of 2.0 means the stock will move up twice as much as the general market, and so on. In this case, Textron has a beta of 2.31, which is pretty high. Generally speaking, I like to see a beta below 1.2 for retirees.


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