What is Beta?

Mar. 13, 2023 | RedChip Companies

Beta is a measurement for analyzing a stock's volatility. Beta is used by some investment professionals to determine a stock's volatility relative to the general market. A stock's beta is typically measured against the S&P 500 Index. The beta of the S&P 500 is 1.00. A beta of 1.40 means that the stock theoretically could move down or up as much as 40% more than the general market. Low-beta stocks are purchased by some investment managers when the market outlook is less than positive or highly volatile. High-beta stocks are purchased when the outlook for the market is positive. The problem with using beta to determine which stocks to buy is that like all technical analysis, it is not foolproof. Smaller-cap stocks, as the most volatile asset class, have the highest beta. They are particularly difficult to analyze using beta because some of the issues are thinly traded. Jeffrey B. Little and Lucien Rhodes make the point in "Understanding Wall Street" that "beta never remains constant and that predicting its future direction can be hazardous. For example, banks stocks were once thought to be low-beta issues, which has not been the case in more recent years."

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