Beta

Formula

Beta = Covariance(Stock, Market) / Variance(Market)

How to interpret it

A beta of 1 means the stock tends to move in line with the market. Above 1 means it's more volatile than the market (amplifying both gains and losses); below 1 means it's calmer. A negative beta — rare — means it tends to move opposite to the market.

Example

A stock with a beta of 1.3 has historically tended to rise about 13% when the market rose 10%, and fall about 13% when the market fell 10% — more volatile than average. A utility with a beta of 0.6 typically moves less.

Common uses

• Gauge how sharply a stock tends to move relative to the overall market.
• Build a lower-volatility portfolio by favouring stocks with beta below 1.
• Understand that a high-beta stock amplifies both market gains and losses.
• Use beta to size positions according to how much market risk you want to take.

Limitations

• Beta is backward-looking and can change over time, so past sensitivity may not predict the future.
• It measures only market-related volatility, not company-specific risk, and tells you nothing about valuation or quality.
• Use it for understanding risk, not picking stocks alone.