What is beta?

INVESTING TERMS

Bank sign on glass wall of business center

What is

BETA?

Credit score gauge. Good and Bad meter. Credit rating history report. Vector illustration.

Deeper definition

Beta represents how a security responds to market swings. A beta of 1 is an indication that the price of the security moves with the market. A beta of less than 1 means that the security is less volatile than the market. A beta of more than 1 means the security is more volatile than the market overall.

Indeed, when thinking about risk as the possibility of a stock losing value, beta becomes a proxy for risk. Look at it in terms of an early technology stock with a price that moves up and down more than the market does. This would naturally lead you to think that the stock is riskier than a utility industry stock with a low beta.

report credit score banking borrowing application risk form document loan business market concept - stock image

Are your liabilities exceeding your assets? Check out if refinancing is right for you.

Beta example

An exchange-traded fund, or ETF, with a beta of 0.65 is 35 percent less volatile than the market. Most utility stocks have a beta of less than 1. Most high-end stocks have a beta of more than 1, offering the possibility of a higher rate of return — but posing more risk.

This infographic was designed by Avalaunch Media

Beta offers a quantifiable and clear measurement. There are variations in beta based on things such as the market index used and the time period measured, but when looked at in a broad context, beta is basically straightforward.

African woman holding in hand paper bills bank receipt using calculator on table calculate debt loan tax cost to pay manage finances concept doing accounting paperwork budget analysis, close up view

Real estate or property investment. Home mortgage loan rate. Saving money for retirement concept. Coin stack on international banknotes with house model on table. Business growth background

For those who follow CAPM, beta is a significant measure. The price variability of a stock is important in the assessment of risk.

Beta is the measure of the risk or volatility of a portfolio or investment compared with the market as a whole. Beta is used in the Capital Asset Pricing Model (CAPM) to help calculate the expected return of an asset.