What is the beta of a stock?

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william1941 | College Teacher | (Level 3) Valedictorian

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Beta is one of the measures used to compare the risk- return profile of different stocks. By definition, the beta of the stock market is assigned a value of 1.

Now if a stock’s price volatility is more than that of the market it is assigned a beta greater than 1. The exact value depends on what the change in the value of the stock is for a unit change in the value of the market. For example if the value of stock A changes by 20% for every 1% percent change in the value of the market it is given a higher beta than a stock B which only changes by 2% for every 1% change in the value of the market.

Stocks with a higher beta can provide a higher return than that provided by the market, but at the same time they are also riskier as the loss incurred when the market falls is much more in the case of these stocks.

A low beta stock rises and falls at approximately the same rate as the market. Stocks with a beta less than 0, vary in price opposite to that of the market, i.e. their value goes up when the market falls and vice versa.

Investors, use the beta of a stocks, while choosing between them to find those that match their risk appetite and the returns they expect to make.