Beta
InvestingDefinition
How much a stock moves relative to the overall market (typically the S&P 500). A beta of 1.0 means the stock tends to move in lockstep with the market. Beta of 1.5 means the stock moves 50% more than the market (more volatile). Beta of 0.5 means it moves half as much as the market (defensive). Negative beta means the stock tends to move opposite the market (rare outside gold miners or inverse ETFs).
High-beta stocks hurt more in downturns but benefit more in rallies. Low-beta stocks offer smoother rides at the cost of lower upside in bull markets.
High-beta stocks hurt more in downturns but benefit more in rallies. Low-beta stocks offer smoother rides at the cost of lower upside in bull markets.
Formula
Beta = Covariance(stock, market) divided by Variance(market)
Example
Utility stocks typically have a beta around 0.3. During a 20% market crash, a utility portfolio might only fall 6%. Semiconductor stocks often have betas above 1.5. In the same crash they could fall 30% or more.