Beta
Beta is a risk
measure comparing the volatility of a stock's
price movement to the general market.
Overview
-
Beta
is derived from a formula that measures
the volatility of a stock compared to the
volatility of the market in general (as
measured by a market index such as the S&P
500, DJIA, etc). Beta's companion measure
for volatility is alpha.
- The Beta for a
stock may vary in up- versus down-markets.
- Monthly data is
preferred.
Beta
provides a good idea of a stock's inherent risk
or sensitivity to general market fluctuations.
Signals
High beta
stocks react strongly to variations in the market,
and low beta stocks are less affected by market
variations.
- If Beta is 1,
then an issue has the same volatility
as the general market. It is either growing
at the same rate or declining at the same
rate.
- If Beta is greater
than 1, then an issue is more volatile.
At 1.25 it will probably move 25% more than
the market. If the market is in an up trend,
then the security will gain 25% more than
the general market.
- If Beta is less
than 1, then an issue is less volatile.
At 0.5 it probably will move only 50% or a
half of the market. If the market is In a
downtrend, it will only lose 50% of what the
general market loses.
- If beta is less
than 0, then the stock is moving in a reverse
pattern to the index. When the index moves
up the stock declines and vice versa.
Calculating
Beta
To calculate
the 200-day Beta for a stock (in comparison to
the S&P index), you would compute the 200 one-day
percentage changes in S&P and the 200 one-day
percentage changes in the stock. These calculations
produce 200 ordered pairs that are then charted
as a scatter graph, and the slope of the least-squares-fit
line is the value for beta. (Alpha is the y-intercept
of the least-squares-fit line.)
Filtering
Beta
- Filter Beta =
1, results return companies that are either
growing at the same rate or declining at the
same rate.
- If Beta is greater
than 1, results return at 1.25 it will probably
move 25% more than the market. If the market
is in an up trend, then the security will
gain 25% more than the general market.
- If Beta is less
than 1, results return at 0.5 it probably
will move only 50% or a half of the market.
If the market is In a downtrend, it will only
lose 50% of what the general market loses.
- If beta is less
than 0, result return stocks that are moving
in a reverse pattern to the index. When the
index moves up the stock declines and vice
versa.
