UK Accounting Glossary
The beta (ß) of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole. An asset with a beta of 0 means that its price is not at all correlated with the market. A positive beta means that the asset generally follows the market. A negative beta shows that the asset inversely follows the market; the asset generally decreases in value if the market goes up and vice versa.
Beta, the second Greek letter, is used by investors to mean the volatility of any stock, mutual or hedge fund, or portfolio relative to its market. Beta, like alpha, is a risk-adjusted measure relative or benchmark. Like alpha, beta has origins in CAPM and Modern Portfolio Theory where the market return of a portfolio is compared to a “risk-free” market rate or benchmark. Arbitrage Pricing Theory (APT), which uses multiple betas, models a corresponding beta for each APT market risk factor. Statistical software packages are available to calculate beta, and investment advisers sometimes keep a beta book where they can look up the beta of an individual stock, sector, mutual fund or market index and compare it to the beta of a stock market index for the same period. A beta of 1.0 means a stock’s risk is the same as the S&P 500 Index, a beta of 2.0 means a stock’s risk is above the market’s. Remember: risk and return are a trade-off and low beta stocks may produce a low return as well as lower risk.
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This glossary post was last updated: 4th February 2020.