Recently my financial adviser has been talking about my portfolio's "beta". I have also seen beta listed for some investments (for example: http://www.google.com/finance?q=goog). What is "beta" and how do I use it?


3 Answers 3


Beta is an indication of a Stock's risk with respect to the market. For instance if a stock had a beta of 1 it means it is in tandem with the S&P 500.

If it is more than 1, the stock is volatile. If it is less than 1, it implies market movement doesn't affect this stock much.

Tech stocks and small cap stocks have high beta, utilities have low beta. (In general, not always).

Hope this helps - I've tried to explain it in very simple terms!


In addition to individual stocks, your entire portfolio will also have a beta. It would be equal to the weighted sum of the individual asset betas So a beta portfolio of 1 would have approximate risk equal to a market index. You would use this to construct a risk level that you were comfortable with, given the expected return of the individual assets. You are also interested in obtaining a high level of "alpha" which means that your portfolio is earning more than what would be expected, given it's level of risk.


I don't think either of these answers are accurate.

A beta of 0 means that your stock/portfolio does not change accordingly or with the market, rather it acts independent.

A beta above 0 means the stock follows what the market does. Which means if the market goes up the stock goes up, if the market goes down, the stock goes down. If the stock's beta is more than 1 the stock will go up more if the market goes up, or go down more if the market goes down.

Inversely if the stock is less than 0 the stock will follow the market inversely. So if the market goes up, the stock goes down. If the market goes down, the stock goes up. Again a greater negative beta, the more this relationship will be exaggerated.

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