Beta of an action: what is it – Dictionary of Economics

Beta Concept

The beta coefficient (β) of a stock measures the degree of variability of the return of a stock with respect to the average return of the “market” in which it is traded and for this reason it is a concept widely used by financial analysts.

Beta (β) measures ‘systematic’ or ‘market’ risk. The more volatile a stock is relative to the market index, the higher its ‘market risk’.

When its beta = 1 (neutral value) the stock moves in the same proportion as the index or has the same systematic risk. For example, if the market is up 10% in the last year, the stock is up by the same amount, and if it is down 7%, the stock is down exactly the same.

When its beta >1 (aggressive value) the stock registers a higher variability than the index, which shows that the stock has a higher risk than the market. For example, if the market is up 8% in the last year, the stock is up more, and if it is down 12%, the stock is also down more.

When its beta < 1 (defensive value) the share registers less variability than its reference index or poses less risk to the market. For example, if the market is up 7% in the last year, the stock is up less, and if it is down 5%, the stock is up more.

In summary:

The greater the standard deviation of a stock’s historical returns, the greater its historical volatility and therefore its risk.

The higher the beta (β) of a stock, the higher its ‘systematic risk’ or ‘market risk’.

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Beta Examples: Comparisons of Three Stocks with Different Betas and What They Mean

Calculation of Endesa’s two-year ‘beta’ (from January 1, 2010 to December 23, 2011). The resulting beta of 0.810 means that historically (in the last two years), if the index with which the relationship is analyzed (IBEX 35) rises, Endesa’s share rises less (only an average of 81% of that rise) and if the IBEX 35 falls, Endesa shares fall less (only an average of 81% of that fall). In short, Endesa has a Beta (β) much less than 1, that is, it is a defensive value: when the index goes up, Endesa goes up less, but when the index goes down, Endesa also goes down less.

Calculation of Arcelor Mital’s two-year ‘beta’ (January 1, 2010 to December 23, 2011). The resulting beta of 1.487 means that historically (in the last two years), if the index with which the relationship is analyzed (AEX, Amsterdam Stock Exchange) rises, the Arcelor Mital share rises more (an average of 48.7% above the rise in the AEX) and if the AEX falls, the Arcelor Mital stock falls further (deeper than the index by 48.7% on average). In short, Arcelor Mital has a Beta (β) much greater than 1, that is, it is a very aggressive value: when the index goes up, Arcelor Mital goes up much more, but when the index goes down, Arcelor Mital also goes down much more.

Apple’s two-year ‘beta’ calculation (January 1, 2010 to December 23, 2011). The resulting beta of 1.061 means that, historically (over the last two years), if the index to which the relationship is analyzed (SP 500) goes up, Apple stock goes up more (an average of 6.1% more than the SP 500) and if the SP 500 goes down, Apple stock goes down more (an average of 6.1% more than that drop). In short, Apple is a value with a Beta (β) somewhat greater than 1, but close to 1, that is, it is not too far from the behavior of the market.

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Xavier Puig. Doctor in Business Administration and Management and director of the Banking and Finance programs at UPF Barcelona School of Management.

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