Beta

Beta measures how much a stock's returns have moved relative to the overall market: a beta of 1.0 matches the market's volatility, above 1.0 is more volatile than the market and below 1.0 is less volatile.

How beta is calculated and read

FINRA's guide to stocks describes beta as a common measure of a stock's volatility relative to the broader market and states that a stock with a beta above 1.0 is more volatile than the overall market. Statistically, beta is the slope from regressing a stock's periodic returns on those of a benchmark index, typically the S&P 500, over a multi-year window. A beta of 1.2 means that, on average over that window, when the index moved 1% the stock moved about 1.2% in the same direction. A beta of 0.7 implies moves of about 0.7% for the same index change, and a negative beta means the stock has tended to move opposite to the market. Because the number depends on the benchmark, period and return frequency, published betas for the same stock differ across providers and are estimates rather than fixed properties.

Hypothetical example: a stock's monthly returns averaged 1.3 times the S&P 500's over five years, a beta of 1.3. If the index falls 10%, beta suggests a decline of about 13% before any company-specific news. See volatility for the absolute measure.

What beta does and does not tell you

Beta captures only the part of a stock's movement explained by the market, sometimes called systematic risk. It says nothing about the risk specific to the company, such as an earnings miss or a product recall, which shows up as movement unexplained by the index. A low-beta stock can therefore still fall sharply on its own news, and a high-beta stock can be perfectly stable in a flat market. Beta is also backward-looking: it summarizes how the stock behaved over the chosen window, and businesses change, so a company that added debt or shifted into a new line of business may have a very different sensitivity going forward. Portfolio managers use a weighted average of holdings' betas to estimate how the whole portfolio might respond to a market move, which is one input into position sizing and hedging decisions rather than a forecast.

Hypothetical example: a portfolio 60% in a beta-1.5 stock and 40% in a beta-0.5 stock has a beta of 0.6 × 1.5 + 0.4 × 0.5 = 1.1, implying about a 5.5% fall for a 5% market drop. See hedging and the position size calculator.