Definition:
Beta measures a stock’s volatility versus the market’s volatility. A stock’s volatility is calculated by comparing its return verses that of the overall market return. If a stock’s price does not move in the same direction as the market, it has a beta of zero. A beta above zero means that the stock follows the market. A Beta of 1 means that the stock follows the market very closely If a stock has a negative Beta, then its price moves the opposite direction of the market. The closer a stock is to a negative 1, the more the stock moves the opposite direction of the market.
Example Beta:
If a stock has a Beta of 2.0, it is twice as volatile as the market. If the S&P 500 fell by -10% in a given month, then the stock would be expected to fall around -20%. The stock would also be expected to gain more than the general market during an up market.
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