Low beta generally means lower price volatiltiy than the average stock. A beta of 1.0 means the stock over the allocated time frame moved similar to the rest of the market. Alpha is excess return in relation to a benchmark and is commonly how to buy ecp crypto used to reveal how much active fund managers outperform the index they are trying to beat. At the same time, many technology stocks are relatively new to the market and thus have insufficient price history to establish a reliable beta.

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A negative beta is when an asset moves in the opposite direction of the stock market. While the concept of risk is hard to factor in stock analysis and valuation, one of the most popular indicators is a statistical measure called beta. Beta is a measure of a stock’s volatility in relation to the overall market. By definition, the market, such as the S&P 500 Index, has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0.

Beta can be used to help diversify how much energy does bitcoin mining really use it’s complicated 2021 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. Beta measures a stock’s correlation to the market, which can help project its returns. Meanwhile, alpha compares a particular stock’s actual performance to the market’s performance.

What Beta Means When Considering a Stock’s Risk

It helps investors understand how a stock’s price may change concerning broader market fluctuations. A beta above 1 indicates higher volatility than the market, terra luna announcement while a beta below 1 suggests lower volatility. In practice, the choice of index makes relatively little difference in the market betas of individual assets, because broad value-weighted market indexes tend to move closely together.

How to Calculate the Beta Coefficient

• It’s a convenient measure that can be used to calculate the costs of equity used in a valuation method.
• There are also a few industry groups, such as gold miners, where a negative beta is typical.
• The beta coefficient finds various applications in finance and investing.
• It is also commonly referred to as “equity beta” because it is the volatility of an equity based on its capital structure.
• The greater the absolute value of the beta coefficient, the stronger the impact will be.

No, the beta coefficient and correlation coefficient are different measures. Beta measures the systematic risk of a stock in relation to the market, while correlation measures the degree of linear relationship between two variables. Beta focuses on the stock’s response to market movements, whereas correlation describes the strength and direction of the relationship between two assets.

Beta vs Alpha

Beta Coefficient, often referred to simply as “Beta,” measures the sensitivity of a stock’s returns to changes in the overall market returns. It quantifies the systematic risk or volatility of an asset relative to the market. A Beta greater than 1 indicates higher volatility than the market, while a Beta less than 1 suggests lower volatility.

The maker of household brands such as Pampers, Oral, Pantene, and Gillette, as of June 2024 has a five-year beta of 0.42. In other words, its share price fluctuates much less than the broader market. For every 1% move in the market, Proctor & Gamble’s shares moved 0.42% on average. That’s good in terms of protecting against losses but also means limited upside potential compared to other options.

CAPM is used to price risky securities and to estimate the expected returns of assets, considering the risk of those assets and the cost of capital. Beta quantifies a stock’s sensitivity to market movements, indicating its risk level. A beta greater than 1 signifies higher volatility compared to the market, while a beta less than 1 suggests lower volatility.

Alpha and beta are metrics that investors use to analyze the risk of a security or portfolio. Unlevered beta, or asset beta, also assesses the performance of a security in response to market fluctuations. An analyst will generally select an index most appropriate to compare with the chosen stock.

Many consider stocks in the utility sector to have betas less than 1 since they’re not very volatile. Gold, on the other hand, is quite volatile but has tended to move inversely to the market. Lower beta stocks with less volatility do not carry as much risk, but they generally provide less opportunity for a higher return.