Although bear markets can be concerning, they also provide opportunities to investors if you know where to look.
Beta is an investment term it pays to understand. Here’s what it means.
What is beta?
Beta is the measure of the risk or volatility of a portfolio or investment compared with the market as a whole. Beta is used in the Capital Asset Pricing Model (CAPM) to help calculate the expected return of an asset.
Beta represents how a security responds to market swings. A beta of 1 is an indication that the price of the security moves with the market. A beta of less than 1 means that the security is less volatile than the market. A beta of more than 1 means the security is more volatile than the market overall.
For those who follow CAPM, beta is a significant measure. The price variability of a stock is important in the assessment of risk. Indeed, when thinking about risk as the possibility of a stock losing value, beta becomes a proxy for risk. Look at it in terms of an early technology stock with a price that moves up and down more than the market does. This would naturally lead you to think that the stock is riskier than a utility industry stock with a low beta.
Beta offers a quantifiable and clear measurement. There are variations in beta based on things such as the market index used and the time period measured, but when looked at in a broad context, beta is basically straightforward.
Example of beta
An exchange-traded fund, or ETF, with a beta of 0.65 is 35 percent less volatile than the market. Most utility stocks have a beta of less than 1. Most high-end stocks have a beta of more than 1, offering the possibility of a higher rate of return — but posing more risk.
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