Beta

Beta (or the “beta coefficient”) is a way to measure the relative risk (as measured by volatility) of a share or tracker fund. 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 typically moves up by 10% when the market has risen 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. Therefore, a stock that swings more than the market over time has a beta above 1.0, while a stock that is less volatile than the market will have a beta below 1.0.

Shares with a high beta are generally more volatile and therefore seen as higher risk than those with a low beta – such as utility companies.

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

 

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