In the world of investing, volatility matters. Investors are reminded of this every time there is a downturn in the broader market and individual stocks that are more volatile than others experience enormous swings in price.
Volatility is a proxy for risk; more volatility generally means a riskier portfolio. The volatility of a security or portfolio against a benchmark is called Beta.
In short, Beta is measured via a formula that calculates the price risk of a security or portfolio against a benchmark, which is typically the broader market as measured by the S&P 500.
Here’s how to read stock betas:
– 1.0 means the stock moves equally with the S&P 500
– 2.0 means the stock moves twice as much as the S&P 500
– 0.0 means the stocks moves don’t correlate with the S&P 500
– -1.0 means the stock moves precisely opposite the S&P 500
The formula to calculate a security’s Beta is fairly straightforward. The result, expressed as a number, shows the security’s tendency to move with the benchmark.