STOCK BETA

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Beta is a measure of the volatility or systematic risk of a security or portfolio in comparison to the market as a whole. It is also known as the beta coefficient. Beta is important because it measures the risk of an investment that cannot be reduced by diversification.

The market by default has a beta measurement of 1.0. Individual stocks are ranked according to how they differ from the market baseline. If a stock swings more than the market baseline, then it has a higher beta. If it swings less, then it has lower beta.

Beta is useful for determining whether the risk is worth the potential return on an investment. Higher-beta stocks are riskier, but typically, they have the chance for greater return than lower-beta,lower-risk stocks. For example, a stock with a beta of 1.75 will offer 1.75 times the typical market return.

Above all, these are few things one should keep in mind when evaluating beta.
* Beta measures co-movement, not volatility 
* Beta levels can change over time 
* Beta is not necessarily a complete and comprehensive measure of risk.

Investdata Academy

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