beta

A measure of a stock’s risk relative to the market, usually the S&P 500 index. The market’s beta is always 1.0; a beta higher than 1.0 indicates that, on average, when the market rises, the stock will rise to a greater extent and when the market falls, the stock will fall to a greater extent. A beta lower than 1.0 indicates that, on average, the stock will move to a lesser extent than the market. The higher the beta, the greater the risk. The use of beta to measure stock and portfolio volatility has fallen out of favor over the years as investors tend to look more at standard deviation to measure volatility. The biggest drawback of beta is that it’s only useful when calculated against a relevant benchmark. When using beta, keep in mind that the measure is trying to account for market-related risk. Companies also have company-specific business and financial risk that is not accounted for through a stock’s beta.