What is Beta?
Beta measures a stocks volatility relative to the overall market (S&P 500). It shows how much a stock moves when the market moves.
- Beta = 1 - Moves with the market
- Beta > 1 - More volatile than market (e.g., beta of 1.5 means 50% more volatile)
- Beta < 1 - Less volatile than market
- Negative beta - Moves opposite to market (rare)
Beta by Sector
- High beta - Technology, consumer discretionary, financials
- Low beta - Utilities, consumer staples, healthcare
Using Beta in Portfolio Construction
Your portfolio beta is the weighted average of individual stock betas. Adjust your overall portfolio beta based on risk tolerance:
- Aggressive investors might target portfolio beta of 1.2-1.5
- Conservative investors might target 0.6-0.8
Limitations of Beta
Beta is calculated from historical data and assumes past relationships continue. It also doesnt capture company-specific risks.