What is beta and how is it used?

Beta measures the volatility of a security or a portfolio relative to a market benchmark. Beta is used to measure the sensitivity of a stock’s return to the market’s return. What Is Beta? How Is Beta Used? What Is Beta? For example, a stock’s risk is measured against a benchmark stock index, such as the S&P 500 Index in U.S. trading.

What does a beta of 1 mean?

A stock with a beta higher than 1 typically carries more risk and along with higher returns. A stock with a beta lower than 1 tends to carry less risk and lower returns. However, it does not solely indicate volatility. It is possible for a volatile asset to have a beta of zero, which indicates it is moving in alignment with the market.

What is asset Beta?

Asset beta (also called unlevered beta) refers to the comparison of a company that does not take its debt into consideration. This calculation still includes the risk of the business. Subscribe to our daily newsletter to get investing advice, rankings and stock market news.

What does a higher beta mean?

A beta that is greater than 1.0 indicates that the security's price is theoretically more volatile than the market. For example, if a stock's beta is 1.2, it is assumed to be 20% more volatile than the market. Technology stocks and small cap stocks tend to have higher betas than the market benchmark.