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Beta and its Characteristics

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Beta and its Characteristics

Beta and its Characteristics. [ Beta ] – In finance, the beta (β or beta coefficient) of an investment indicates whether the investment is more or less volatile than the market. In general, a beta less than 1 indicates that the investment is less volatile than the market, while a beta more than 1 indicates that the investment is more volatile than the market. Volatility is measured as the fluctuation of the price around the mean: the standard deviation.

Beta and its Characteristics

Characteristics of Beta

Here is a basic guide to various betas:

Negative beta:

A beta less than 0, which would indicate an inverse relation to the market- is possible but highly unlikely. However, some investors believe that gold and gold stocks should have negative betas because they tended to do better when the stock market declines.

Beta of 0:

Basically, cash has a beta of 0. In other words, regardless of which way the market moves, the value of cash remains unchanged (given no inflation).

Beta between 0 and 1 :

Companies with volatilities lower than the market have a beta of less than 1 (but more than 0). As we mentioned earlier, many utilities fall in this range.

Beta of 1 :

A beta of 1 represents the volatility of the given index used to represent the overall market, against which other stocks and their betas are measured. The S&P 500 is such an index. If a stock has a beta of one, it will move the same amount and direction as the index. So, an index fund that mirrors the S&P 500 will have a beta close to 1.

Beta greater than 1 :

This denotes a volatility that is greater than the broad-based index. Again, as we mentioned above, many technology companies on the Nasdaq have a beta higher than 1.

Beta greater than 100 :

This is impossible as it essentially denotes a volatility that is 100 times greater than the market. If a stock had a beta of 100, it would be expected to go to 0 on any decline in the stock market. If you ever see a beta of over 100 on a research site it is usually the result of a statistical error, or the given stock has experienced large swings due to low liquidity, such as an over-the-counter stock. For the most part, stocks of well- known companies rarely ever have a beta higher than 4.

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Beta and its Characteristics
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Beta and its Characteristics
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Beta and its Characteristics. [ Beta ] - In finance, the beta (β or beta coefficient) of an investment indicates whether the investment is more or less volatile than the market. Volatility is measured as the fluctuation of the price around the mean: the standard deviation.
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BBALectures.com
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