Beta

Beta (or the ‘beta coefficient’) is a way to measure the relative riskiness of a share. It does so by comparing the historic movement in the share price to that of the market as a whole. So for example if a share moved up by 10% when the market rose by 50%, beta is 10/50 = 0.2. Equally, a share that increased by 100% when the market rose 50% has a beta of 100/50 = 2.

This is useful for predictive purposes as a share with a historic beta of say 0.8 will be expected to move 80% of the distance of the wider market in the future. Shares with a high beta value – say technology and software companies – are generally more volatile and therefore seen as higher risk than those with a low beta – such as utility companies. A diversified portfolio will aim to maintain a mixture of high and low beta stocks as a way of managing risk.

• See Tim Bennett’s video tutorial: What is ‘beta’?

Merryn

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