What is beta?
Beta describes the volatility of an asset – such as shares or bonds – in relation to the general market. A share that is more volatile than the index of which it is part – for example the Standard & Poor's 500 – has a 'high beta'.
Where have you heard about beta?
Not in everyday conversation, that is for sure. But specialist investment publications and learned articles on finance will contain references to beta and to its importance for working out what the return on an asset is likely to be.
What you need to know about beta...
Beta is a measure of an asset's likely reaction, based on past behaviour, to changes in the market. A "high beta" stock, for example, would tend to exaggerate a swing up or down in the market as a whole, while one with a "low beta" would prove less volatile than the overall market. Analysts crunch a lot of data on an asset's history and award it a beta rating. A beta of one means the asset moves in line with the market, a beta of 1.4 means the asset is thought 40% more volatile than the market, one of 0.5 is 50% less volatile.