The beta of an investment is a measure of the systematic or volatility because of exposure to market movements as opposed to individual security factors.
Beta is the tendency of a security’s returns to respond to trends the market.
Beta is also a measure of relative strength or relative momentum.
For example, if we are looking at the beta of a stock and assume the S&P 500® Index is “the market”, if the stock has a beta of 1.5 it means the price has moved 50% more than “the market”.
Beta is used the Capital Asset Pricing Model (CAPM).
Beta reflects the sensitivity of a portfolio’s return to variations in the market index. For example, for large company stocks the S&P 500® Index is considered “beta” and how another index, security, fund, or investment program ebbs and flows with it is a ratio. Beta is the tendency of a security’s or investment program’s returns to respond to price changes in a market index. If the S&P 500® Index is “beta” and the comparison “benchmark”, then the S&P 500® Index beta equals 1. The beta of the investment program or security is relative to the index. For example, if the security or investment program has a beta of 1.5, it is expected to be 50% more volatile than the index you are comparing it to. If you compare it to the S&P 500® Index, the investment program or security is expected to gain or lose 50% more.
Beta is considered a measure of the volatility, or systematic risk, of an investment program or security in comparison to a benchmark index.
Of course, beta goes both ways. A high beta implies the movement was better than the underlying index. A low beta implies the movement was lower than the underlying index.
What many investors don’t realize is that beta is also a measure of relative strength or weakness.
Also, read: Alpha