Beta
A measure of a stock's volatility relative to the market. Beta > 1 means it moves more than the index; Beta < 1 means it moves less.
Formula
Beta = Covariance(Stock Returns, Market Returns) ÷ Variance(Market Returns)
Beta quantifies a stock's sensitivity to broad market moves. A beta of 1.5 means the stock historically moves 1.5× the S&P 500 — if the market drops 2%, expect this stock to drop ~3%. A beta of 0.5 means it moves half as much.
Beta is calculated via regression of the stock's returns against the index over a trailing period (typically 2–5 years, monthly returns). High-beta stocks (tech, biotech, growth) are amplified plays on the market; low-beta stocks (utilities, consumer staples) are defensive.
Beta is backward-looking and unstable — a stock's beta can shift significantly as its business model evolves or market structure changes. It also does not capture idiosyncratic (company-specific) risk, only systematic risk. Use it as one tool, not the only one.
Example
Portfolio A holds stocks with an average beta of 1.8. The S&P 500 falls 15% in a bear market. Expected portfolio drawdown: ~27%. Portfolio B holds average beta 0.6 stocks; expected drawdown: ~9%. High beta amplifies both gains and losses.
Related Terms
Correlation
A measure of how closely two assets move together, ranging from −1 (perfectly opposite) to +1 (perfectly in sync).
IntermediateHedging
Opening an offsetting position to reduce the net risk of an existing trade or portfolio against adverse price movements.
IntermediateLarge Cap
Companies with a market capitalization generally above $10 billion. Large caps are the most liquid, most-analyzed tier of the stock market.
BeginnerRelative Strength (vs Index)
How a stock or sector is performing compared to a benchmark index like the S&P 500. Outperforming the index = positive relative strength.
IntermediateS&P 500
A market-cap-weighted index of 500 large US companies. The most widely used benchmark for US stock market performance.
BeginnerSector Rotation
The movement of institutional money between sectors of the economy as the business cycle evolves. One sector's outperformance often comes at another's expense.
AdvancedSmall Cap
Companies with a market capitalization roughly between $300 million and $2 billion. Higher growth potential but also higher risk than large caps.
IntermediateSystematic Risk
Risk that affects the entire market or a broad asset class and cannot be eliminated through diversification.
IntermediateUnsystematic Risk
Company- or sector-specific risk that can be reduced through diversification across uncorrelated assets.
Intermediate