Beta

A measure of a stock's sensitivity to market movements — how much the stock tends to move for every 1% move in the overall market.

Beta is calculated by regressing a stock's returns against the returns of a market benchmark (typically the S&P 500) over a historical period. A beta of 1.0 means the stock has historically moved in line with the market. A beta of 1.5 means it has moved 50% more than the market — up 15% when the market rises 10%, but also down 15% when the market falls 10%. A beta below 1 indicates lower volatility relative to the market; a negative beta means the asset tends to move opposite to the market (gold and some defensive stocks can exhibit this).

Beta is a central concept in the Capital Asset Pricing Model (CAPM), which argues that a stock's expected return should equal the risk-free rate plus its beta times the equity risk premium. High-beta stocks should provide higher returns over time to compensate for their higher risk — but this theoretical relationship is imperfect in practice.

Beta is a backward-looking measure calculated from historical data and can change over time as a company's business evolves. It also captures only market-related (systematic) risk, not company-specific (idiosyncratic) risk. A biotech stock with binary trial outcomes may have low beta during a broad market selloff but could drop 80% on a single drug failure — a risk beta completely misses.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.