There are different ways to measure the volatility (severity of price movements) of a stock. One of these measures is “beta.” It shows how the volatility of a stock compares to the volatility of a benchmark.
What is beta?
As mentioned above, beta shows how the volatility of a stock compares to the volatility of its benchmark. There are other measures of volatility, such as standard deviation, that are calculated apart from a benchmark.
A beta of greater than 1.0 means that a stock is more volatile than the benchmark. A beta of less than 1.0 means that a stock is less volatile than the benchmark. The beta of the benchmark is 1.0.
Beta is proportional, so you can say that a stock with a beta of 3.0 is “three times as volatile” as the benchmark, whereas a stock with a beta of 2.0 is only “twice as volatile” as the benchmark. The same would be true with betas below 1.0 – a stock with a beta of 0.5 is “half as volatile” as the benchmark and a stock with a beta of 0.25 is “a quarter as volatile” as the benchmark.
However, it is important to remember that beta is typically calculated with data over a long period of time, so it should not be assumed that the long-term statistical relationships will hold true each and every day. The measure is also historical, so it is possible that the volatility of the stock and its relationship to the volatility of the market could change drastically going forward. Regardless, beta is still a useful measure to understand the volatility of a stock.
Examples of beta
Below are beta values for several different stocks. These values were taken from Yahoo Finance on July 28, 2023:
Procter & Gamble (symbol = PG) – beta = 0.41
Walmart (symbol = WMT) – beta = 0.50
Coca-Cola (symbol = KO) – beta = 0.54
SPDR S&P 500 ETF (symbol = SPY) – beta = 1.00
Peloton Interactive (symbol = PTON) – beta = 1.90
Etsy, Inc (symbol = ETSY) – beta = 1.98
Wayfair (symbol = W) – beta = 3.18
Notice that the older, more conservative companies have low betas and the younger, technology companies have high betas. Betas will not always line up how we “expect” them to, but these examples do. Also notice that the S&P 500 ETF, predictably, has a beta of 1.00.
I am not suggesting that low or high beta stocks are better to invest in. A technology company, as an example, may have a very high beta meaning that it is much more volatile than the market, but the expected return may also be higher than the market’s expected return.
How is beta calculated?
The formula for beta is the covariance of the stock’s returns and the benchmark’s returns divided by the variance of the benchmark’s returns.
If you have any comments, questions, or ideas for future posts, please let me know
I hope you found this post helpful and educational. If you have any comments, questions, or ideas for future posts, please let me know. You can reach me directly via email at crawford@ulmerfinancial.com.
Commentaires