For this article and with most investing research, you will only be considering historical beta. But professional financial analysts may also consider the other types of beta, so you may want to know what they are. Beta is a mathematical term that measures how risky a stock is compared to the entire market. The value of Beta can be positive or negative depending on the stock in question. For example, fund managers might brag that their funds generated 13% returns when the S&P returned 11%. These stocks have higher returns than the S&P 500, according to the Fama and French Three-Factor Model.

What Are Example of High Beta Stocks?

The higher the value, the more the company tends to fluctuate in value. Numerically, it represents the tendency for a security’s returns to respond to swings in the market. A negative beta is when an asset moves in the opposite direction of the stock market. Beta is a measure of a stock’s volatility in relation to the overall market. By definition, the market, such as the S&P 500 Index, has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market.

Others are willing to take on additional risk for the chance of increased rewards. Every investor needs to have a good understanding of their own risk tolerance and a knowledge of which investments match their risk preferences. Low beta generally means lower price volatiltiy than the average stock. At the same time, many technology stocks are relatively new to the market and thus have insufficient price history to establish a reliable beta. Leading a dedicated team of 10 wealth managers Vivek’s leadership and strategic acumen are pivotal in delivering tailored financial solutions and driving client success in wealth management. You will have no right to complain to the Financial Ombudsman Services or to seek compensation from the Financial Services Compensation Scheme.

A well-diversified portfolio can reduce overall risk and improve the chances of achieving a consistent return on investment. Beta can play a big role in portfolio construction and volatility expectations. For example, you can calculate the weighted average beta of the stocks in your portfolio to get a sense of how volatile you can expect your investments to be on a day-to-day basis. A beta value of 1.5 implies that the stock is 50% more volatile than the broader market.

Growth-oriented investors are attracted to higher beta funds as they promise the potential to deliver higher returns when the markets are up. Now let’s use the above formula to calculate the alpha ratio in mutual funds. Let’s say the fund’s beta against its index is 1.1, and the risk-free rate (G-sec) is 6%. Beta is principally used in the capital asset pricing model (CAPM). This is a model widely used in finance as a way to price risky securities and gauge expected returns.

In general, when interest rates go up, Bond prices typically drop, and vice versa. Bonds with higher yields or offered by issuers with lower credit ratings generally carry a higher degree of risk. All fixed income securities are subject to price change and availability, and yield quebex is subject to change. Bond ratings, if provided, are third party opinions on the overall bond’s credit worthiness at the time the rating is assigned.

How to Calculate Stock Beta in Excel

We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Historical or hypothetical performance results are presented for illustrative purposes only.

Ratings are not recommendations to purchase, hold, or sell securities, and they do not address the market value of securities or their suitability for investment purposes. ETFs & ETPs.Before investing in an ETF, you should read the prospectus carefully, which provides detailed information on the fund’s investment objectives, risks, learn how to get started in penny stocks charges, and expenses and unique risk profile. Performance data represents past performance and is no guarantee of future results.

• However, beta is calculated using historical data points and is less meaningful for investors looking to predict a stock’s future movements for long-term investments.
• Beta, often considered first, quantifies an asset’s volatility or systematic risk compared to the market as a whole.
• The beta formula is useful because many different timeframes and benchmarks can measure an asset’s volatility.
• Beta is the hedge ratio of an investment with respect to the stock market.

How should investors assess risk in the stocks that they buy or sell? While the concept of risk is hard to factor in stock analysis and valuation, one of the most popular indicators is a statistical measure called beta. The beta coefficient theory assumes that stock returns are normally distributed from a statistical perspective.

Understanding Alpha in Mutual Funds

Growth stocks typically tend to have a high beta, indicating greater market volatility. At this point, your spreadsheet should only have columns A, B, C, D, and E filled out, containing just the dates, market prices, and relevant stock prices. Ensure that the dates in column A are sorted from the oldest to the most recent. Now, we’ll use Microsoft (MSFT), Apple (AAPL), and Johnson & Johnson (JNJ) as the three securities in this portfolio beta calculation example. This formula calculates the percentage change in value from one time period (t – 1) to the next (t), providing a transparent view of how the value has changed over time. Make sure to apply this formula to each row, except for the first row, as it lacks a preceding period for comparison.

Similarly, a conservative fund that holds bonds will have a low beta and typically outperform the S&P 500 during a poor year for the market. If you look at the beta of a typical mutual fund, it’s essentially telling you how much market risk you’re taking. You have the option to use any of the three methods previously discussed for calculating stock beta to determine the beta for each security in your portfolio. Calculating the beta of a portfolio is essential for understanding its overall risk in relation to the market.

Is Beta a Helpful Measure for Long Term Investments?

• The best mutual funds are those which help you realise your financial dreams effectively and efficiently.
• Racy stocks, such as tech upstarts with the potential to revolutionize how certain things are done, fall into this category.
• Rebate rates vary monthly from $0.06-$0.18 and depend on your current and prior month’s options trading volume.
• However, a high Beta stock is also likely to be more volatile than the overall market.
• Buffett focused on value investing, dividend growth, and “growth at a reasonable price” strategies during his career.

A stock’s price variability is important to consider when assessing risk. If you think about risk as the possibility of a stock losing its value, beta has appeal as a proxy for risk. Think of an early-stage technology stock with a price that bounces up and down more than the market.

It simply measures how much a fund moves relative to its benchmark. For example, a low-beta fund can still carry huge risks if it invests in volatile asset classes. Alpha and beta are just two of the many factors you should assess before investing in a mutual fund.

If you want to mitigate the swings in your portfolio, you can choose to focus on ravenpack pricing investing in low-beta stocks. Conversely, if you have a higher risk tolerance and want the possibility of higher gains, some strong high-beta stocks could be what you need. Another troubling factor is that past price movement is a poor predictor of the future. Betas are merely rear-view mirrors, reflecting very little of what lies ahead.

For example, as of Jan. 17, 2025, the beta for Microsoft (MSFT), as listed on Yahoo! Finance, is 0.90. More money has been lost waiting to buy stocks than in holding stocks through downturns. Calculating percentages of total revenue is a powerful technique for analyzing companies’ operating performance. There is a lot of hope baked into its share price, resulting in wild swings whenever it fails/exceeds expectations and a five-year beta of 2.41, as of June 2024.