Beta

Beta compares an investment’s returns with those of a benchmark, usually a broad market index. Mathematically, it is the covariance of the two sets of returns divided by the variance of the market’s returns, which equals their correlation multiplied by the ratio of their standard deviations. A beta of 1 means the investment has historically moved, on average, as much as the market; 1.5 means about 50% more in either direction; 0.5 means about half as much. A negative beta, rare for shares, means it has tended to move against the market.

Beta is used to describe market risk: the part of an investment’s risk that diversification cannot remove. Defensive sectors such as utilities have tended to have low betas, and many technology and smaller companies high ones. Two cautions apply. Beta measures co-movement with the market, not total risk: a single speculative company can have a low beta yet be very risky, because most of its moves are unrelated to the market. And beta is estimated from past data, changes over time and depends on the index and period chosen.