Beta
A measure of an investment's sensitivity to market movements. A beta of 1.0 moves in line with the market; above 1.0 indicates higher sensitivity, below 1.0 indicates lower sensitivity.
Beta quantifies the systematic risk of an investment—the portion of its volatility that is driven by overall market movements rather than company-specific factors. The market (typically represented by the S&P 500) has a beta of 1.0 by definition.
Interpreting Beta
- Beta > 1.0 — The asset tends to amplify market movements. A stock with beta 1.5 is expected to rise 15% when the market rises 10%, but also fall 15% when the market drops 10%.
- Beta < 1.0 — The asset is less volatile than the market. Utility stocks and bonds often have low betas.
- Beta < 0 — The asset tends to move opposite the market. Gold and certain hedge fund strategies sometimes exhibit negative beta.
Beta is a cornerstone of the Capital Asset Pricing Model (CAPM) and is used to estimate the expected return of a security. When constructing a diversified portfolio, blending high-beta and low-beta assets lets you fine-tune overall market exposure to match your risk tolerance.