What does the BETA of a stock represent?

Posted by Eric LeRiche | May 25, 2010 .

By definition, the market itself has an underlying beta of 1.0, and individual stocks are ranked according to how much they deviate from the macro market (for simplicity purposes, the S&P 500 is usually used as a proxy for the market as a whole). A stock that swings more than the market (i.e. more volatile) over time has a beta whose absolute value is greater than 1.0. If a stock moves less than the market, the absolute value of the stock’s beta is less than 1.0.

More specifically, a stock that has a beta of 2 follows the market in an overall decline or growth, but does so by a factor of 2; meaning when the market has an overall decline of 3% a stock with a beta of 2 will fall 6%. Betas can also be negative, meaning the stock moves in the opposite direction of the market: a stock with a beta of -3 would decline 9% when the market goes up 3% and conversely would climb 9% if the market fell by 3%.

Higher-beta stocks mean greater volatility and are therefore considered to be riskier, but are in turn supposed to provide a potential for higher returns; low-beta stocks pose less risk but also lower returns. In the same way a stock’s beta shows its relation to market shifts, it also is used as an indicator for required returns on investment (ROI). If the market with a beta of 1 has an expected return increase of 8%, a stock with a beta of 1.5 should increase return by 12%.

There are many options to find the beta of a stock but I like the free,option at google: http://www.google.com/finance/stockscreener#c0=MarketCap&c1=PE&c2=DividendYield&c3=Price52WeekPercChange&region=us&sector=AllSectors&sort=&sortOrder=

Trade carefully

Eric Leriche
http://www.investorrules.com

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