Risk
Beta
How much an investment tends to move when the market moves, with 1.0 meaning it moves in line.
How it works
A beta of 1.5 implies that when the market rises 10%, this holding has historically risen about 15%, and fallen about 15% when the market fell 10%. Below 1.0 means it moves less than the market.
Beta measures the part of risk you cannot diversify away, because it is exposure to the market itself. It is the input to the capital asset pricing model and to most risk-adjusted return calculations.
Where it misleads people
Beta is backward-looking and depends heavily on the window and the index chosen. It also says nothing about company-specific risk — a fraud can have a beta of 0.8 right up until it is discovered.
Formula
Beta = covariance(asset, market) ÷ variance(market)Related terms
- AlphaReturn above what the risk taken would ordinarily have earned — the part attributable to skill.
- CorrelationA measure from −1 to +1 of how closely two investments move together.
- Capital asset pricing modelA model saying an asset’s expected return depends on the risk-free rate plus its market risk.
- Systematic riskRisk that affects the whole market and cannot be removed by holding more things.
- VolatilityHow much an investment’s returns bounce around their average — the standard measure of risk.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.