What is beta? Why beta? Well it is the volatility of the stock or portfolio to the market as a whole. This conversation can get really deep really quick if we start discussing various financial models and the actual calculation of it using regression analysis. If you would like to know more drop me a line and we can discuss more in depth.
What can it really tell us about a stock or portfolio? Well when you look at a stock that has a beta that has a beta of 1.0, this stock would typically move with the market. What is the market? Good question! The market that is typically benchmarked in the United States is the Standard and Poors 500 or S&P 500 for short.
Take a look at what S&P has on their own site, I guess they don’t mind bragging about themselves. The S&P 500® has been widely regarded as the best single gauge of the large cap U.S. equities market since the index was first published in 1957. The index has over US$ 5.58 trillion benchmarked, with index assets comprising approximately US$ 1.31 trillion of this total. The index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% coverage of U.S. equities.
Many utilities stocks, and your older companies like Johnson and Johnson or Proctor and Gamble have betas less than 1.0. The tech stocks which are seen as riskier have betas that are mostly greater than 1.0. There are exceptions to the rule, just like any rule. This is just a general rule of thumb. A stock or portfolio with a beta of 1.30 is expected to be 30% more volatile than the market.
Beta can be summed up by looking at risk and return. The greater the risk, the greater the potential for high returns and conversely there is also the greater the risk of losing it all. Talk with your financial adviser to see what kind of risk you feel comfortable taking on.
Thanks for this explanation of Beta. I heard that word being tossed around and I didn’t know what it meant. You explain a difficult concept in easy way.
@ After College Money – Oh the gears have started grinding with some explanations of financial concepts. There are so many great financial concepts that I would like to just use the word when describing something, but some people have no idea what I am talking about. Now is time to educate them. I just need to find a way to direct them to my blog now! Thanks for the comment and make sure you go out and toss the word beta around and impress your friends. 🙂
Enjoyed every bit of your blog article.Really thank you! Really Cool.