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What is beta?

Beta definition

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'.

Key takeaways:

  • What is Beta? Beta is a measure of a stock's volatility compared to the broader market.

  • A beta value of 1 indicates that the stock's price moves in line with the market, while a value greater than 1 indicates greater volatility and a value less than 1 indicates lower volatility.
  • Beta is commonly used by investors to assess risk and compare the relative volatility of different investments.
  • Beta can help investors make more informed decisions by providing a measure of a stock's sensitivity to market movements.

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.

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