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Beta is a metric used to measure an investment's volatility relative to the overall market. Here’s how investors use beta to analyze stocks.
Beta (ϐ) is a number that measures the volatility of an asset relative to the market for that asset. The beta for a stock, for instance, tells you how closely a stock tends to track moves in the overall market. Beta can be calculated for individual stocks, exchange-traded funds (ETFs), mutual funds and other assets.
In calculating an asset’s beta, the market is typically represented by a benchmark index such as the S&P 500. The market’s beta is 1.0, representing the inherent risk of investing in that market or systematic risk. For an individual stock, beta represents stock-specific or unsystematic risk.
Assets with beta below 1.0 are less volatile than the overall market, while assets with beta greater than 1.0 are more volatile and may be riskier. A beta of zero means the asset’s volatility has historically not been driven by market moves.
Aswath Damodaran, a professor at New York University’s Stern School of Business, publishes data on the beta of various industries. For instance, the beta of food processing stocks as a group was 0.61 in January 2024, relative to the New York Stock Exchange Composite, an index comprising all stocks trading on the New York Stock Exchange (NYSE).
This means that on days when the NYSE was up or down 100 points, food processing stocks rose or fell 61 points on average. In contrast, the beta for building supply retailers was 1.94. When the market moved up or down 100 points, these stocks moved up or down 194 points on average.
Investors should be aware that beta is based on historical data, providing insight into an asset’s past relative volatility. It is not a reliable tool for forecasting future performance.
Example: “Roberta believed risky assets provide higher potential rewards, so she invested mainly in high-beta assets like technology stocks.”
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