Definition
Beta is derived by regressing a stock's returns against a benchmark index's returns (typically the S&P 500). It's a cornerstone of the Capital Asset Pricing Model (CAPM). Utilities and consumer staples typically show beta of 0.3–0.7 (defensive); high-growth tech and small-caps often exceed 1.5. Beta is calculated over a specific historical window (commonly 3 or 5 years of monthly returns) and can change meaningfully as a company matures. Beta measures only market-related (systematic) risk — it says nothing about company-specific (idiosyncratic) risks. Two stocks with the same beta can have very different total volatility.
β = Covariance(Ri, Rm) / Variance(Rm)
Ri = stock returns, Rm = market returns; conceptually, beta = slope of stock returns regressed on market returns
Example
A stock with beta of 1.5 tends to move 1.5% for every 1% market move. If the S&P 500 rises 10%, the stock might rise ~15% (before adding stock-specific factors). If the market falls 10%, the stock might fall ~15%.
Frequently Asked Questions
What is a good beta?
Depends on your risk tolerance. Conservative investors prefer beta < 1 (dampened market risk). Aggressive investors seeking outperformance during rallies accept beta > 1 (amplified moves in both directions).
Can beta be negative?
Yes — gold, US Treasuries, and certain defensive strategies sometimes exhibit negative beta, meaning they tend to rise when equities fall. This makes them useful for hedging.
Does beta capture all risk?
No — it only captures systematic (market-wide) risk. Company-specific risks (earnings surprises, management issues, lawsuits) are separate. Total risk = systematic + idiosyncratic.