What is Beta?
Beta measures a stock's volatility relative to the market. Beta of 1 means it moves with the market. Beta > 1 means more volatile. Beta < 1 means less volatile.
Think of it like this
Imagine boats on the ocean (market). A speedboat (high beta) bounces dramatically with waves. A cruise ship (low beta) stays steadier. A submarine (negative beta) moves opposite to waves!
Formula
Beta = Covariance(Stock, Market) / Variance(Market)- Covariance: How stock moves with market
- Variance: Market volatility
Why it matters
- Measures risk and volatility
- High beta = higher potential returns and losses
- Low beta = more stability, less dramatic swings
- Important for portfolio diversification
What's a good value?
< 0.5
Very Low
Much less volatile than market
0.5-1.0
Low
Less volatile than market
1.0
Market
Moves with the market
1.0-1.5
High
More volatile than market
> 1.5
Very High
Much more volatile
Real-world example
Tesla beta: 1.8 - swings wildly. Utilities beta: 0.5 - steady and boring. Gold miners beta: sometimes negative - hedge against market. Tech stocks: 1.2-1.5 - generally volatile.
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