What is Beta in Stocks?
Beta is a measure of a stocks volatility in relation to the overall market. It is used to evaluate the expected risks and returns of a portfolio and can help investors understand the risk in a given stock.
Here are some key points about beta in stocks:
- Beta is a component of the Capital Asset Pricing Model (CAPM), which calculates the cost of equity funding and can help determine the rate of return to expect relative to perceived risk.
- The market, such as the S&P 500 Index, has a beta of 1.0, and individual stocks are ranked accordingly. Stocks with betas higher than 1.0 are considered riskier, while those with betas lower than 1.0 are considered less risky.
- Beta is a measure of the volatility or systematic risk of a security or portfolio compared to the market as a whole.
- It is important to note that beta is a backward-looking metric and has limitations, as it only measures one kind of risk.
In summary, beta is a useful tool for evaluating the risk and potential returns of a stock, but it is important to consider its limitations and use it in conjunction with other metrics when making investment decisions.
