Beta
How much a stock moves with the S&P 500, not how much it moves overall. Beta of 1 means the stock tracks the index; 1.5 means it moves 1.5x the index up or down on average; 0.5 means it moves half as much in step with the index. Caveat 1: Beta is a regression coefficient and the rolling window matters -- a 2-year monthly Beta vs a 5-year weekly Beta for the same stock can differ by 0.3 or more. Caveat 2: Beta only captures the part of risk that correlates with the index (systematic risk). The residual variation -- earnings surprises, lawsuits, management changes -- is idiosyncratic and Beta says nothing about it. Caveat 3: Leveraged equity (high debt-to-equity) inflates Beta mechanically because the equity buffer is thinner.
Why it matters
Tells you how much market risk you're taking on. Used in the Capital Asset Pricing Model (CAPM) to estimate a stock's expected return and cost of equity.
How to read it
Beta = 1.0 means the stock tracks the index; >1.0 swings more than the index up or down on average; <1.0 swings less than the index. <0 moves opposite to market — inverse ETFs are designed for negative beta; true negative beta in individual stocks is uncommon. CRITICAL: beta only captures the part of risk that is correlated with the market. A low-beta stock can still have large absolute swings driven by company-specific news (idiosyncratic risk, captured by residual standard deviation, NOT by beta). The low-volatility anomaly: Frazzini & Pedersen (2014) showed low-beta stocks have historically delivered higher risk-adjusted returns than high-beta, contradicting CAPM predictions.
Source
Sharpe, William. "Capital Asset Prices" (1964). CAPM foundational paper introducing systematic risk measurement.
Lessons that use this term
Related terms
Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Build-Up Method
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