Beta: An Overview

Beta measures a stock's price volatility𝓰 relative to the overall market. It is an important factor for investors to check when they want to choose a stock that matches their tolerance for risk.

By definition, the market, such as the S&P 500, has a beta of 1.0. Every stock has a beta that indicates how widely its price swings in comparison with the market as a whole. A stock that swings more than the market over time has a beta above 1.0. A stock that moves less than the market will have a beta of less than 1.0.

Understanding Beta in Investing

How should investors assess risk in stocks? While the concept of risk is hard to factor in stock analys♍is and valuation, one of the most popular indicators is beta, a statistical measure of a stock's price volatility relati𝓀ve to the overall market.

Analysts use it to determine a stock's risk profile. 澳洲幸运5开奖号码历史查询:High-beta stocks, which generally means any ♒stock with a beta higher than 1.0, are considered riskier while offering higher potential returns. Low-beta stocks, those with a beta under 1.0, are considered less risky but are unlikely to outperform the market as a whole.

Beta and CAPM

Beta is used in the capital asset pricing model (CAPM), a widely used method for pricing risky securities and for generating estimates of the expཧected returns of assets, particularly sto🌜cks.

The CAPM formula uses the total average market return and the beta value of the stock to determine the rate of return that shareholders might reasonably expect or require based on perceived investment risk. In this way, beta can impact a stock's expected rate of return and share valuation.

Where Can I Find a Stock's Beta?

A stock's beta is listed on the stock summary or "snapshot" page of most financial news and stock trading websites, along with the stock's latest price, volume, and other data. Some widely used sources include:

• Yahoo Finance: This website provides beta alongside other metrics and charts.
• Morningstar: This company offers in-depth analysis, research reports, and comprehensive stock metrics, including beta.
• Bloomberg: The Bloomberg Terminal is a go-to for institutional investors due to the enormous amount of data it offers but its subscription expense excludes most individual investors.
• LSEG Data & Analytics: Previously named Refinitiv, this is another popular professional platform.
• Tradingview: This platform is highly customizable and offers a vibrant community for trading ideas.
• Brokerage Platforms: Most brokerage platforms allow beta analysis directly tied to portfolio performance as well as individual stock analytics.

How to Read Stock Betas

Beta is a numerical value. The overall market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. Market in this context means an index, such as the 澳洲幸运5开奖号码历史查询:S&P 500.

Each company listed in the S&P 500 has a beta that indicates how its price moves in relation to t𝓰he index ovౠer a set time frame. 

Companies whose share prices were less volatile than the S&P 500 will hav꧅e a beta value under 1.0.

A beta of 0 means the stock's movements are not at all correlated with the broader market. This is a positive signal to investors looking to diversify their portfolios against a downturn in the broader market.

A stock with a beta of -1.0 moves in the opposite direction of the broader mark🔥et, which means it can serve as a hedging instrument against the mark🎐et.

Share prices that are more volatile than the S&P 500 will have beta values over 1.0. The higher the ♌value, the more volatile the share price. A beta of 2.0 means the stock is twice as volatile as the market. That suggests it could return greater rewards or bigger losses than t🍨he market as a whole.

Calculating the Beta for a Stock

It's easiest to just check the stock's webpage to find its beta, but an investor can calculate the number. There are several steps:

• Step 1 -Compile Historical Price Data: Obtain historical price data for both the stock and the market index.
• Step 2- Calculate Periodic Returns: Using the price data, calculate the returns for the stock and the market index over the chosen time frame.
• Step 3- Compute the Covariance between the Stock and the Market: Calculate the covariance between the stock's returns and the market's returns. Covariance indicates how the returns of the stock and the market move together.
• Step 4- Calculate the Variance of the Market Returns: This calculation represents how much the market returns fluctuate over time.
• Step 5- Calculate the Beta: Using the covariance calculated in steps 4 and 5, the beta is calculated as follows: Beta = Covariance (Stock Returns, Market Returns) / Market Variance
  

High Beta vs. Low Beta: Which Is Better?

The higher the potential reward, the higher🐓 the risk. That is a common belief among investors.

High-beta stocks are expected to provide higher potential returns because they carry more risk. Low-beta stocks offer lower po🦋tential returns because they carry less risk.

Which is best depends on wha𓆏t type of investo💖r you are.

More conservative investors, including those who want to tap into their funds soon, tend to prefer low-beta stocks. Many companies consistently deliver steady revenues and profits both in timesꦓ of economic expansion and contraction. Positive or negative surprises are minimal and valuations are based on realistic earnings expectations.

Investors keen to bag big short-term gains, including day traders, are more interested in high-beta stocks. Their share prices tend to jump around a lot, offering opportunities to cash in. You could make a fortune or lose one. Innovative tech startups usual🎶ly fall෴ into this category.

Higher beta stocks also tend to outperform in bull markets when the economy is in expansion mode and confidence is high. Lower beta stocks tend to fare better during recessions.

Low Beta Stock Example

Low-beta stocks tend to be defensive stocks. There is a constant demand for their products or services, regardless of the 澳洲幸运5开奖号码历史查询:economic cycle, resulting i๊n steady profits and revenues, which often translate into a steady share price and regular dividend payments.

A classic example of a low-beta stock is Proctor & Gamble. The maker of household brands such as Pampers, Pantene, and Gillette had a five-year beta of 0.41 as of May 2025.

In other words, its share price fluctuates much less than the broader market. For every 1% move in the market, Proctor & Gamble's shares moved 0.41% on average. That's good in terms of protecting against losses though it also means limited upside potential compared to other options.

High Beta Stock Example

High beta is generally associated with small companies and 澳洲幸运5开奖号码历史查询:growth stocks. These are companies that are expected to increase their revenues and the🐈ir profits fast. They have shown enough promise to draw speculative investors looking for big returns.

Many of the highest beta stocks are young tech companies. A company behind the next big thing typically commands a high valuation. Investors buy the stock hoping it lives up to its potential. High hopes create volatility. A slip-up could cause the share price to tumble dramatically. Likewise, a hint of good news can lead to a big rally.

Tesla falls into this category. There is a lot of hope baked into its share price, resulting in wild swings whenever it makes the news cycle. Tesla's five-year beta was 2.43 in May 2025.

Advantages of Using Beta as a Proxy for Risk

Beta is useful to followers of CAPM. If you think about risk a𒈔s the possibility of a stock losing its ☂value, beta has appeal as a proxy for risk.

Intuitively, it makes plenty of sense. Think of an early-stage technology stock with a price that bounces up and down more than the market. It's hard not to think that stock will be riskier than, say, a 澳洲幸运5开奖号码历史查询:safe-haven utility industry stock with a low beta.

Be♏ta offers a clear, quantifiable measure that is easy to work with.

Disadvantages of Using Beta as a Proxy for Risk

The definition of risk is the possibility of loss. Of course, when🌠 investors consider risk, they are thinking about the chance that the stock they buy will fall in💃 value.

The trouble is that beta, as a proxy for risk, doesn't distinguish between upside and downside price movements. For most investors, down🍰side movements are a risk, while upside ones mean opportuni🧔ty. Beta doesn't tell an investor which the stock is likely to experience.

澳洲幸运5开奖号码历史查询:Value investors scorn beta because it implies that a stock that has fallen sharply in value is riskier than it was before it fell. A value investor would argue that a company represents a lower-risk investment after it falls in value because investors can get the same stock at a low𒊎er price.

Beta says nothing about the stock's price relative to fundamental factors like changes in company leadership, new product discoveries, or future cash flows. For value investors, that's a problem.

Consider a utility company: Let's call it Company X. Company X has been considered a defensive stock with a low beta. If it entered the merchant energy business and assumed more debt, X's historic beta would no longer capture the substantial risks the company just took on.

It's also worth noting that newer stocks have insufficient price history to establish a reliable beta.

Anoth🔯er troubling factor is that past price movement is a poor predictor of the future. Betas are rear-view mirrors, reflecting nothing that lies ahead.

Furthermore, the beta measure on a single stock tends to flip around over time, which makes it somewhat unreliable. Granted, for traders looking to buy and sell stocks within short periods, beta is a fairly good risk metric. For investors with long-term horizons, it's less useful.

The Differences Between Alpha and Beta

Both alpha and beta help investors asꦡsess the performance and risk of investments relative to the market. While beta measures a stock's sensitivity to market movements, alpha is about performance beyond market movements.

Positi🦩ve alpha signals strong returns driven by skill or unique factors independent of market trends.

Beta focuses on systematic risk, while alpha measures idiosyncratic performance. Traders use beta to manage the portfolio's vulnerability to market swings, and then incorporate alpha to reveal whether the trades add value beyond those market movements.

Beta Trading Strategies

There are high-beta strategies that focus on stocks with a beta significantly higher than 1, giving investors a c🌠hance for high returns in good times (and high losses in bad time🔥s).

Low-beta strategies prioritize 🌄stability and downside protection b🔜y focusing on defensive stocks.

More advanced st﷽rategies, called market-neutral strategies, balance long and short positions to eliminate the impact of beta. There also are beta 🌊rotation strategies that shift between high- and low-beta assets based on market direction, requiring some level of market timing.

Other approaches include smart beta strategies, which target specific risk factors such a🍒s value or momeꩲntum.

The Bottom Line

Beta is the volatility of a security or portfolio compared to its benchmark. It's a numerical value that signifies how much a stock price jumps around over time. The higher the value, the more the stock tends to fluctuate in value.

Ultimately, it's important to make the distinction between short-term risk—where beta and price volatility are useful—and longer-term, fundamental risk, where big-picture risks are more likely to come into play.

High betas may mean price volatility over the near term, but they don't always rule out long-term opportunities.