Beta
A measure of a stock's volatility relative to the market. Beta > 1 means it moves more than the index; Beta < 1 means it moves less.
Beta = Covariance(Stock Returns, Market Returns) ÷ Variance(Market Returns)
Beta quantifies a stock's sensitivity to broad market moves. A beta of 1.5 means the stock historically moves 1.5× the S&P 500 — if the market drops 2%, expect this stock to drop ~3%. A beta of 0.5 means it moves half as much.
Beta is calculated via regression of the stock's returns against the index over a trailing period (typically 2–5 years, monthly returns). High-beta stocks (tech, biotech, growth) are amplified plays on the market; low-beta stocks (utilities, consumer staples) are defensive.
Beta is backward-looking and unstable — a stock's beta can shift significantly as its business model evolves or market structure changes. It also does not capture idiosyncratic (company-specific) risk, only systematic risk. Use it as one tool, not the only one.
On the desk
Portfolio A holds stocks with an average beta of 1.8. The S&P 500 falls 15% in a bear market. Expected portfolio drawdown: ~27%. Portfolio B holds average beta 0.6 stocks; expected drawdown: ~9%. High beta amplifies both gains and losses.