Beta is the measure of risk and volatility of portfolio or stock has in comparison to the market risk. It is used to calculate the expected return of an asset in the capital asset pricing model (CAPM) and is a useful measure of overall investment risk.
Beta Coefficient On Finance
The Beta coefficient uses regression analysis to calculate a number, generally ranging between -2 and 2. A Beta of 1 represents a nearly identical behavior with the overall market. Let us for example take Apple Inc, which at the time of this writing has a Beta coefficient of 0.99. If one is to estimate that the market will go up 1% over the next year, he would expect AAPL stock to do the same because its Beta is nearly 1. Alternatively, if the market was expected to go down 1%, one would also expect AAPL stock to go down the same amount.
Another stock, Ford Motor Co., represented by the ticker F, has a higher Beta of 1.17. This indicates the stock has a 17% higher volatility than the market. Following the logic above, a one 1% increase in the market should translate to a 1.17% increase in F stock. Likewise, a 1% decrease in the market should result in a 1.7% decrease in F.
What Does Lower Beta Mean?
A Beta can also be lower than one, such as is the case of Alphabet Inc, Google’s holding group. This stock (GOOGL) has a Beta of 0.9. If we expect the market to make a gain of 10%, then GOOGL is projected to increase by 9%, because its Beta coefficient is lower than the market.
A negative Beta indicates a negative correlation to the market. A stock with a beta of -0.5 is expected to go up 0.5% for every 1% decrease in its underlying index (market). A stock with a Beta of -2 is expected to go down 2% if the index goes up 1%.
It is important not to become too reliant on Beta, as it is a historical indicator and does not necessarily represent future behavior. There are many factors that can change the Beta score in an unpredictable manner; therefore investors must perform research to understand how the score came to be.