Only Zacks Rank stocks included in Zacks hypothetical portfolios at the beginning of each month are included in the return calculations. Zacks Ranks stocks can, and often do, change throughout the month. Certain Zacks Rank stocks for which no month-end price was available, pricing information was not collected, or for certain other reasons have been excluded from these return calculations. Levered beta (equity beta) is a measurement that compares the volatility of returns of a company’s stock against those of the broader market. In other words, it is a measure of risk, and it includes the impact of a company’s capital structure and leverage. Equity beta allows investors to assess how sensitive a security might be to macro-market risks.

  1. It is expressed as a ratio, where a score of one represents performance comparable to a generic market, and returns above or below the market may receive scores greater or lower than one.
  2. Next, calculate the daily price changes for each (subtract current day price from previous day price, divide by the previous day price and multiply by 100).
  3. The financial crisis in 2008 is an example of a systematic-risk event; no amount of diversification could have prevented investors from losing value in their stock portfolios.
  4. Suppose you know a stock’s 0.9 beta was found by using the S&P 500’s average five-year return as a benchmark.
  5. The stock’s price can follow the market average closely or loosely, or move oppositely to the market average.

It also provides insights about how volatile—or how risky—a stock is relative to the rest of the market. One major drawback of beta is that it’s a backward-looking metric. It’s calculated based on past returns, which may not be consistent with future returns.

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High vs. Low Beta

Portfolio diversification is clever as it spreads your risk across different assets. You can add stocks from more volatile sectors and balance them with low-volatile options. However, you must first determine which stocks have more risk and which have less.

Instead, it’s a look at its level of volatility, and it’s important to note that volatility can be good and bad. Investors aren’t complaining about upward price movements. The downward price movement, of course, will keep people up at night. Covariance certifications for java developers is a measure of how two securities move in relation to one another. Levered beta, also known as equity beta or stock beta, is the volatility of returns for a stock, taking into account the impact of the company’s leverage from its capital structure.

Is it better to have a high or low beta in stocks?

A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock’s beta is less than 1.0. One way for a stock investor to think about risk is to split it into two categories.

Negative β – A company with a negative β is negatively correlated to the returns of the market. For example, a gold company with a β of -0.2, which would have returned -2% when the market was up 10%. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.

However, beta may be a strong factor in quantifying risk if you’re the kind of investor who buys and sells stocks on a regular basis. This indicates that the stock may respond in the opposite direction of the overall market. Using the previous example, you could expect the stock’s price to go up if the S&P 500 goes down and vice versa. A stock with a beta equal to 1 assumes its price moves hand-in-hand with the market. These have some similarity to bonds, in that they tend to pay consistent dividends, and their prospects are not strongly dependent on economic cycles. They are still stocks, so the market price will be affected by overall stock market trends, even if this does not make sense.

People who bet on the wrong side of the volatility could take losses. Often referred to as the beta coefficient, beta is an indication of the volatility of a stock, a fund, or a stock portfolio in comparison with the market as a whole. A benchmark index (most commonly the S&P 500) is used as the proxy measurement for the market. Knowing how volatile a stock’s price is can help an investor decide whether it is worth the risk. Value investors scorn the idea of beta because it implies that a stock that has fallen sharply in value is riskier than it was before it fell. Beta says nothing about the price paid for the stock in relation to fundamental factors like changes in company leadership, new product discoveries, or future cash flows.

That is, it indicates how much the price of a stock tends to fluctuate up and down compared to other stocks. You can use the beta values to build and balance your portfolio between high- and low-risk stocks. However, that is best done by combining multiple risk measures. The popular ones include alpha, standard deviation, and r-squared.

However, cash can be an essential asset, like credit cards. Gold is an ideal example of an asset with a negative beta. Its relationship with the market is inverse, meaning it increases when the market declines and vice versa. Beta can help give investors an idea of the risk in a given stock, and it’s a useful, if incomplete, way of doing so. Bankrate follows a strict
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Jeremiah Awogboro is an experienced content writer with over 8 years of experience. He has a qualified MBChB degree and a keen interest in the stock market and the finance industry. His background in the industry has provided him with valuable experience in this field. Awogboro is dedicated to assisting and reaching out to as many people as possible through his writing. In his spare time, he enjoys music, football, traveling, and reading.