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What Is Beta?
Beta measures a stock's sensitivity to market movements. The S&P 500 itself has a beta of exactly 1.0. A stock with a beta of 1.5 is expected to move 1.5 times as much as the market — up 15% when the market rises 10%, but also down 15% when the market drops 10%.
High-Beta vs Low-Beta Stocks
- High beta (above 1.5): tech growth stocks, biotech, small caps — amplify gains and losses
- Low beta (below 0.7): utilities, consumer staples, healthcare — more defensive
- Negative beta: assets that move opposite the market; gold often qualifies
Systematic vs Unsystematic Risk
Beta captures only systematic risk — market-wide risk that affects all stocks and cannot be diversified away. Unsystematic risk is company-specific (a bad earnings report, a CEO scandal) and can be eliminated by holding a diversified portfolio. A well-diversified portfolio's remaining risk is almost entirely systematic, measured by beta.
Using Beta in Portfolio Construction
Investors use beta to deliberately shape their portfolio's risk profile. Tilting toward high-beta stocks amplifies upside in bull markets. Adding low-beta defensives reduces exposure ahead of expected volatility. Monitoring your portfolio's overall weighted-average beta helps ensure you're taking on the risk you intend.
Limitations of Beta
- Based on historical data — future correlations can change
- Low beta doesn't mean low fundamental risk
- Doesn't account for business quality, balance sheet, or management
- Always combine with P/E, debt, and free cash flow analysis