Glossary - Beta
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. It is used in the capital asset pricing model (CAPM), which describes the relationship between systematic risk and expected return for assets, particularly stocks. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market, while a beta greater than 1 indicates that the security's price will be more volatile than the market.
Also known as
- Beta Coefficient
- β
Use cases examples
- Investment Analysis Report: The beta of Company XYZ's stock is 1.3, indicating it is 30% more volatile than the market.
- Portfolio Management Strategy: Considering your risk appetite, we are looking at assets with a beta lower than 1 to ensure a more stable investment.
Considerations for investors
- Consider a security's beta to assess its risk relative to the market, which can guide portfolio diversification and risk management strategies.
- Be mindful that beta is only a measure of market risk and does not account for the unique circumstances or fundamentals of a company.
Considerations for founders
- Understand that a high beta might make your company's stock seem more attractive to investors seeking high returns, but it also means higher risk.
- Be aware that during times of market volatility, a higher beta can lead to greater fluctuations in the company's stock price.
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