For example, if a stock’s beta is 1.5, it is expected to be 50% more volatile than the market. It is calculated using two specific components, covariance and variance. The beta of individual stocks is often listed as a key statistic in the summary section of stock quotations. However, you can calculate beta on your own, whether for a single stock or an entire portfolio of stocks. Systematic risk, or total market risk, is price volatility that affects stocks across many industries, sectors, and asset classes. Risks that affect the overall market are by their nature difficult to predict and hedge against.

For example, your stock may be highly concentrated in a foreign country. In that case, it may make sense to forgo the standard market benchmark, the S&P 500, and instead use an international market index. A stock’s beta coefficient is a measure of its volatility over time compared to a market benchmark. A beta of 1 means that a stock’s volatility matches up exactly with the markets. A higher beta indicates great volatility, and a lower beta indicates less volatility.

This article comes from our Fool.com team of specialists, as part of our commitment to bring you even more Foolish coverage of our Rule Breakers companies. It does not necessarily reflect the current thinking or guidance of the Rule Breakers team and has not been edited by our premium services editorial team. This results in a beta of 0.57 for the Coca-Cola Company compared to the S&P 500 for August 2015. In this case, Google is considered less volatile than NASDAQ, with its beta of 0.165. Let’s take an example to better understand the beta equation calculation in a better manner.

How Beta Measures Systematic Risk

Covariance measures how the stock moves in relation to the market, while variance measures how far a stock fluctuates compared to its mean. The Capital Asset Pricing Model (or CAPM) describes individual stock returns as a function of the overall market’s returns. Anything that can affect the market as a whole, good or bad, is likely to affect a high-beta stock. A Federal Reserve decision on interest rates, a tick up or down in the unemployment rate, or a sudden change in the price of oil, all can move the stock market as a whole. This can be achieved by obtaining other stocks that have negative or low betas, or by using derivatives to limit downside losses. As data science continues to evolve, the analysis of beta coefficients is likely to become more sophisticated.

What Beta Means for Investors

In a bull market, a beta above 1.0 will likely produce better returns but also come with more risk. Beta can be used to help diversify a portfolio and make better investment decisions. However, beta is only one measure of risk and should not be used in isolation since it only measures past performance. This stock has a beta of 1.5, which is 50% more volatile than the market. However, this also means it could earn 50% more than the market can return in a given period. The investor also wants to calculate the beta of Coca-Cola in comparison to the S&P 500.

What are Equity Beta and Asset Beta?

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In essence, a beta coefficient quantifies the impact of predictors in a statistical model, allowing analysts to make informed decisions based on data. Beta is a statistical measure of the volatility of a stock versus the overall market. It’s generally used as both a measure of systematic risk and a performance measure. The beta for a stock describes how much the stock’s price moves compared to the market. If a stock has a beta above 1, it’s more volatile than the overall market. For example, if an asset has a beta of 1.3, it’s theoretically 30% more volatile than the market.

• For example, a bond ETF’s beta with the S&P 500 as the benchmark would not be helpful to an investor because bonds and stocks are too dissimilar.
• Stocks generally have a positive beta since they are correlated to the market.
• Typically, volatility is a sign of risk, with higher betas suggesting greater risk and lower betas projecting lower risk.
• The recent six-year data shows that Coca-Cola and S&P 500 have a covariance of 14.15, and the variance of Coca-Cola is 26.59.
• The beta is the degree of change in the outcome variable for every 1 unit change in the predictor variable.

Numerically, it represents the tendency for a security’s returns to respond to swings in the market. A stock with a very low beta could have smaller price swings, yet still be in a long-term downtrend. So, adding a down-trending stock with a low beta decreases the risk in a portfolio only if the investor defines risk strictly in terms of volatility and not potential losses.

Each beta coefficient corresponds to a specific predictor, allowing analysts to assess the unique contribution of each variable while controlling for the effects of others. This complexity cheapest way to buy bitcoin adds depth to the analysis, enabling more nuanced interpretations and better decision-making based on the data. Interpreting beta coefficients involves understanding both their magnitude and sign. A positive beta coefficient indicates a direct relationship between the independent and dependent variables, meaning that as one increases, so does the other.

For example, a gold ETF will show a low β and R-squared in relation to a benchmark equity index, as gold is negatively correlated with equities. Another troubling factor is that past price movement is a poor predictor of the fortmatic wallet withdraw future. Betas are merely rear-view mirrors, reflecting very little of what lies ahead.

What is a good beta for a stock?

In the case of levered beta, the beta increases as a company’s total debt level rises. Typically, volatility is a sign of risk, with higher betas suggesting greater risk and lower betas projecting lower risk. Thus, stocks with more significant betas may gain more during bull markets. Put options and inverse ETFs are designed to have negative betas, which means they track the opposite of the benchmark’s trends. There are also a few industry groups, such as gold miners, where a negative beta is typical. Positive covariance suggests that the prices of the two stocks will likely move in the same direction.

Despite these problems, a historical beta estimator remains an obvious benchmark predictor. It is obtained as the slope of the fitted line from the linear least-squares estimator. The OLS regression can be estimated on cryptocurrency trading 2021 1–5 years worth of daily, weekly or monthly stock returns. Investors keen to bag big capital gains or day traders looking to make a quick buck from fluctuating share prices would be more interested in high-beta stocks. The share prices of these companies historically have a tendency to jump around quite a bit. Racy stocks, such as tech upstarts with the potential to revolutionize how certain things are done, fall into this category.