Beta indicates the stock’s volatility in relation to the market. In general, a beta less than 1 indicates that the investment is less volatile than the market, while a beta more than 1 indicates that the investment is more volatile than the market.For example, if a stock’s beta is 1.25, it’s theoretically 25% more volatile than the market. Conversely, if stock’sbeta is 0.6, it is theoretically 40% less volatile than the market.
Higher-beta stocks tend to be more volatile and therefore riskier, but provide the potential for higher returns. Lower-beta stocks pose less risk but generally offer lower returns.
A beta greater than 1 generally means that the asset both is volatile and tends to move up and down with the market. Negative betas are possible for investments that tend to go down when the market goes up, and vice versa. There are few fundamental investments with consistent and significant negative betas, but some derivatives like put options can have large negative betas. Beta can be zero. Some zero-beta assets are risk-free, such as treasury bonds and cash. However, simply because a beta is zero does not mean that it is risk-free.
Beta value summary:
- Beta < 0: Negative Beta – not likely.
- Beta = 0: Cash in the bank.
- Beta Between 0 and 1: Low-volatility
- Beta = 1: Matching the market.
- Beta > 1: More volatility that is greater than the market.
Advantages of using Beta
Thebeta of a stockgives an idea of the risk involved in buying that stock. If you are a trader looking for stocks that fluctuate a lot, then you can trade in high beta stocks. Knowing that you have high beta stocks in your portfolioalso tells you that yourportfolio is more prone to risk and fluctuation.
Having beta to determine volatility, you possibly can better choose those securities that match your criteria for risk. Investors who are likely to handle less risk in their investments may want to invest in stocks with low betas. Those investors who are likely to handle more risk may want to invest in stocks with higher betas.
Disadvantages of using Beta
It is important to note that betais a historically calculated value dependent on how a stock moves compared to a benchmark index.Let’s say a company Y has been a low beta stock historically. When it enters a new business and assumes high debt levels, Y’s historic beta no longer captures the substantial risks the company takeson. At the same time, many IPO stocks that are relatively new to the market have insufficient price history to establish a reliable beta.
How to Find Stocks with High Beta
Investar 5.4 has introduced new scans “Stocks with High Beta”. All you have to do is to select the scans from the Predefined Scans list.
You can view the list of high Beta scans conveniently as follows:
- In Manage Scans, select the scanStock with High Beta
- Change the Favorite View to Fundamentals
- Select View Scans /Favoriteswith Charts
- On the top will be the list of stocks with a Beta column.
- Click on any stock to see it’s chart at the bottom.
Beta is always measured in respect to some benchmark. Therefore, an asset may have different betas depending on which benchmark is used. Just a number is useless if the benchmark is not known.
For traders looking to buy and sell stocks within short time periods, beta is a fairly good risk metric. However, for investors with long-term horizons, it’s less useful.
FAQs
The beta of a portfolio is the weighted sum of the individual asset betas, According to the proportions of the investments in the portfolio. E.g., if 50% of the money is in stock A with a beta of 2.00, and 50% of the money is in stock B with a beta of 1.00,the portfolio beta is 1.50.
What is a good portfolio beta number? ›
Anything under 1.0 indicates a less sensitive reaction to market volatility. For example, a portfolio with a beta less than 1.0 will typically perform close to market performance.
What does a beta of 1.25 mean? ›
Set on a scale of 1.00. If a portfolio had a beta of 1.00, that means its returns are exactly as volatile as the benchmark�s returns. If a portfolio has a beta of 1.25, the portfolio's returns are 25% more volatile than the benchmark�s returns.
How do you read a stock beta? ›
Analysts use beta when they want to determine a stock's risk profile. High-beta stocks, which generally means any stock with a beta higher than 1.0, are supposed to be riskier but provide higher return potential; low-beta stocks, those with a beta under 1.0, pose less risk but also usually lower returns.
How do investors use beta? ›
An investor uses beta to gauge how much risk a stock adds to a portfolio. While a stock that deviates very little from the market doesn't add a lot of risk to a portfolio, it also doesn't increase the potential for greater returns.
How to solve for portfolio beta? ›
Portfolio Beta formula
Take the percentage figures and multiply them with each stock's beta value. For example, if 25% of your portfolio comprises Apple and it has a beta of 1.43, its weighted beta would amount to 0.3575. Add up the weighted beta figures that give you your portfolio beta.
What is the downside beta? ›
In investing, downside beta is the beta that measures a stock's association with the overall stock market (risk) only on days when the market's return is negative. Downside beta was first proposed by Roy 1952 and then popularized in an investment book by Markowitz (1959).
What is the ideal beta for a stock? ›
Theoretically, the beta value of a benchmark index is considered to be 1. The risk factor of securities is evaluated around this number, wherein a stock having a beta coefficient higher than 1 is deemed to be a risky investment venture.
What is a good first beta number? ›
In general, a baseline beta hCG level >100 mIU/mL is generally considered a good, positive result.
Is 0.5 a good beta? ›
If a stock had a beta of 0.5, we would expect it to be half as volatile as the market: A market return of 10% would mean a 5% gain for the company. Here is a basic guide to beta levels: Negative beta: A beta less than 0, which would indicate an inverse relation to the market, is possible but highly unlikely.
Beta readers act as a test audience
Your betas should regularly read and enjoy books similar to yours — familiarity with your genre will help them point out played-out tropes they feel have been overused, or key elements missing from your story. Essentially, your ideal betas are representative of your target audience.
How to calculate beta of a stock with an example? ›
Beta = Covariance (Rs, RI) / Variance (RI)
If a stock returned 8% last year and the index returned 5%, a rough estimate of beta is: 8 / 5 = 1.6. This method only compares two data points. For more data points, running the covariance and variance in a spreadsheet such as Excel is recommended.
What is a good portfolio beta? ›
Anything under 1.0 indicates a less sensitive reaction to market volatility. For example, a portfolio with a beta less than 1.0 will typically perform close to market performance.
What is a good PE ratio? ›
Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio. But it doesn't stop there, as different industries can have different average P/E ratios.
How to solve for beta? ›
In this context, covariance refers to the measure of a stock's return relative to that of the market, and variance refers to the measure of how the market moves relative to its mean. Once those figures are identified, beta is calculated by dividing covariance by variance (Beta = Covariance/Variance).
How do you use asset beta? ›
To do this, look up the beta for a group of comparable companies within the same industry, un-lever each one, take the median of the set, and then re-lever it based on your company's capital structure. Finally, you can use this Levered Beta in the cost of equity calculation.
What is the difference between beta and portfolio beta? ›
The portfolio beta represents the overall systematic risk of a portfolio of securities. Beta (β) is a measure of risk that reflects the sensitivity of an individual security or portfolio to market risk, i.e. the fluctuations in the prices of securities in the broader market.
What does a β of 1.3 mean? ›
The market is described as having a beta of 1. The beta for a stock describes how much the stock's price moves compared to the market. If a stock has a beta above 1, it's more volatile than the overall market. For example, if an asset has a beta of 1.3, it's theoretically 30% more volatile than the market.
What is the significance of beta in the portfolio example? ›
Beta is a useful tool for assessing the risk of an individual stock, while market risk is important for understanding the overall risk of a portfolio. For example, a portfolio that is heavily weighted towards technology stocks may be more exposed to market risk than a more diversified portfolio.
