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justaguide eNotes educator| Certified Educator

The beta of a stock is the level to which the price of the stock changes for a certain change in a benchmark, which is usually the stock market index. For example if the beta of a stock is 1.5 compared to the Dow Jones Industrial Average, or DJIA, a 10% change in the level of the DJIA results in a 15% change in the price of the stock. This change in price can be either upwards or downwards. Stocks with a high beta are more risky than those with a low beta.

Beta control is trying to restrict risk to an appropriate level which the person investing in the stock market can handle. This can be achieved by including the right percentage of high and low beta stocks in the portfolio. The beta of the portfolio would decide the profit or loss made when the market index changes value. A higher beta would yield greater profits when the index value goes up but also result in a greater loss if the index value comes down. A lower beta would restrict profits as well as loses, and keep them closer to the change in the stock market index.