Beta (β)

Beta is a measure of how much a stock's price moves compared to the overall stock market. It shows the stock's volatility relative to a market index like the S&P 500.

Formula

Beta = Covariance(Stock Returns, Market Returns) ÷ Variance(Market Returns)

In practice, most brokers and financial websites calculate this for you using the stock's historical returns versus the market's returns over a specific period (usually 3 to 5 years).

Example

Tesla (TSLA) historically has a beta around 2.0, meaning it tends to move twice as much as the S&P 500 in either direction. Energy stocks like those in the XLE ETF often have a beta closer to 1.2, meaning they're somewhat more volatile than the market average.

How to Interpret It

• Beta = 1.0: The stock moves in line with the market. If the market rises 10%, the stock typically rises 10%.
• Beta > 1.0: The stock is more volatile than the market. A beta of 1.5 means it typically moves 50% more than the market.
• Beta < 1.0: The stock is less volatile than the market. Utility companies often have betas under 1.0, moving more steadily.
• Beta < 0: Rare but possible. The stock moves opposite to the market, useful for hedging.

Limitations

• Beta assumes historical volatility continues into the future, which isn't always true.
• Beta doesn't account for major business changes, new competition, or sector shifts.
• Different time periods (3-year vs. 5-year) can produce different beta values.
• Beta ignores the risk of a company going bankrupt or missing earnings badly.

Related Terms

• Volatility — a broader measure of price fluctuations
• VIX — the market's "fear gauge" measuring expected volatility
• Standard Deviation — another measure of volatility
• Risk — the chance of losing money on an investment