What Is a Beta?

What Is a Beta?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Beta is a metric used in finance as a measure of an investment’s volatility, or risk, in comparison to the market as a whole. Think of it as an investment’s tendency to respond to swings in the market. If an investment has a beta of 1.0, it means that it moves with the market. If it’s more than 1.0, it’s more volatile than the market. Conversely, if beta is less than 1.0, it’s less volatile, hence less risky than the market.

Related Questions

1. What is a good beta?

This largely depends on an investor’s tolerance for risk. If you are risk-averse, a beta less than 1 might be considered good as it indicates less volatility and risk. Conversely, if you are more open to risk for potentially higher returns, a beta greater than 1 could be seen as desirable.

2. Can beta be negative?

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Yes, beta can be negative, though it’s rare. A negative beta indicates that an investment moves in the opposite direction of the stock market. When the market rises, a negative-beta investment generally falls, and vice versa.

3. How is beta calculated?

Beta is calculated using regression analysis, which generally involves comparing the returns of an investment with those of a benchmark index like the S&P 500 over a certain time period.

4. What does a beta of zero mean?

A beta of zero implies that the investment’s price is not at all correlated with the price of the broader market. That means its price changes are independent of the market’s swings.

5. Why is beta important in investing?

Beta is crucial as it allows investors to gauge the risk of an investment compared to the market. This understanding helps them make informed decisions about the risk-reward trade-off for each potential investment.