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.)
