Stock beta what does it mean

Most likely it will to some degree, but how quickly and by how much remains to be seen. For now, it appears as if the central bank may start raising the short-term interest rates it controls in the second half of To date, that has been far enough away to not shake the confidence of the bulls, particularly since tame bond yields have not created much competition for stocks.

Normally, the bond market reacts more quickly to economic data than the Federal Reserve. But that is only occurring to a limited extent this time around, at least in part because of a large number of buyers for yields of any substance.

Yields in a number of markets in Europe and Asia are lower than stateside, or even negative. Inflation could still dampen returns for stocks if bond yields start climbing steadily.

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Measure content performance. Develop and improve products. List of Partners vendors. Beta is a measure of the volatility — or systematic risk — of a security or portfolio compared to the market as a whole. Beta is used in the capital asset pricing model CAPM , which describes the relationship between systematic risk and expected return for assets usually stocks.

CAPM is widely used as a method for pricing risky securities and for generating estimates of the expected returns of assets, considering both the risk of those assets and the cost of capital. A beta coefficient can measure the volatility of an individual stock compared to the systematic risk of the entire market. In statistical terms, beta represents the slope of the line through a regression of data points.

In finance, each of these data points represents an individual stock's returns against those of the market as a whole. Beta effectively describes the activity of a security's returns as it responds to swings in the market. A security's beta is calculated by dividing the product of the covariance of the security's returns and the market's returns by the variance of the market's returns over a specified period.

The calculation for beta is as follows:. The beta calculation is used to help investors understand whether a stock moves in the same direction as the rest of the market. It also provides insights about how volatile—or how risky—a stock is relative to the rest of the market. For beta to provide any useful insight, the market that is used as a benchmark should be related to the stock.

Ultimately, an investor is using beta to try to gauge how much risk a stock is adding to a portfolio. In order to make sure that a specific stock is being compared to the right benchmark, it should have a high R-squared value in relation to the benchmark.

R-squared is a statistical measure that shows the percentage of a security's historical price movements that can be explained by movements in the benchmark index. When using beta to determine the degree of systematic risk, a security with a high R-squared value, in relation to its benchmark, could indicate a more relevant benchmark.

One way for a stock investor to think about risk is to split it into two categories. The first category is called systematic risk, which is the risk of the entire market declining. The financial crisis in is an example of a systematic-risk event; no amount of diversification could have prevented investors from losing value in their stock portfolios.

Systematic risk is also known as un-diversifiable risk. Unsystematic risk , also known as diversifiable risk, is the uncertainty associated with an individual stock or industry.

For example, the surprise announcement that the company Lumber Liquidators LL had been selling hardwood flooring with dangerous levels of formaldehyde in is an example of unsystematic risk.

Unsystematic risk can be partially mitigated through diversification. If a stock has a beta of 1. A stock with a beta of 1. It could be important to consider alpha and beta in tandem when you're reviewing investment opportunities. Bortnem shares a simple example of why:. Predicting how much an investment — or your entire portfolio — may move when the market is up or down can be an important component of investing. If you don't want to experience big swings, you could look for options that have a low beta.

Or, hedge against high beta investments with investments that have a negative beta. If you're not as risk averse, you could look for options with a higher beta that could lead to larger returns. But be careful, a high beta can also mean bigger losses. Also, remember that beta doesn't measure factors that may be specific to a single company or asset.

It can be helpful in building your portfolio, but you want to consider beta within a larger context and only as one once piece of analysis. For you. World globe An icon of the world globe, indicating different international options. Get the Insider App. Click here to learn more. A leading-edge research firm focused on digital transformation. Good Subscriber Account active since Shortcuts.

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